```

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

[_]  REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                                       OR

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the fiscal year ended December 31, 2006

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from               to         .

                                       OR

[_]  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

               Date of event requiring this shell company report

                         Commission file number 2-16830

                  INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
             (Exact name of Registrant as specified in its charter)

                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

                 82 Menachem Begin Road, Tel Aviv, Israel 67138
                    (Address of principal executive offices)

     SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO 12(B) OF THE ACT:

     TITLE OF EACH CLASS             NAME OF EACH EXCHANGE ON WHICH REGISTERED
     None                            None

 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      None
                                (Title of Class)

        SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO
                           SECTION 15(D) OF THE ACT:
                6% Cumulative Participating Preference "C" Shares
               6% Cumulative Participating Preference "CC" Shares
               7-1/2% Cumulative Redeemable Preference "D" Shares
               7-1/2% Cumulative Redeemable Preference "DD" Shares
              7-1/2% Registered Subordinated Capital Notes due 1998

                                                                              NUMBER OF SHARES OUTSTANDING AS
                  TITLE OF CLASS                                                   OF DECEMBER 31, 2006
                  --------------                                                   --------------------

Ordinary "A" Shares, par value NIS 0.10 (the "Ordinary A Shares")                          15,100
Ordinary "B" Shares, par value NIS 0.10 (the "Ordinary B Shares")                         134,899
Ordinary "B1" Shares, par value NIS 0.10 (the "Ordinary B1 Shares")                             1
8% Cumulative Participating Preferred Ordinary Shares, par value
NIS 0.001(the "Preferred Ordinary Shares")                                              1,000,000
```

```

                                                                              NUMBER OF SHARES OUTSTANDING AS
                  TITLE OF CLASS                                                    OF DECEMBER 31, 2006
                  --------------                                                    --------------------

6% Cumulative Participating Preference "C" Shares, par value
NIS 0.00018 (linked to the U.S.dollar at the rate of $1 = NIS 0.00018) (the
"C Shares")                                                                            17,000,000
6% Cumulative Participating Preference "CC" Shares, par value
NIS 0.003 (linked to the U.S.dollar at the rate of $1 = NIS 0.0003) (the
"CC Shares")                                                                              999,998
6% Cumulative Participating Preference "CC1" Shares, par value
NIS 0.003 (linked to the U.S.dollar at the rate of $1 = NIS 0.0003) (the
"CC1 Shares")                                                                           1,734,779
7-1/2% Cumulative Redeemable Preference "D" Shares, par value
NIS 0.03 (linked to the U.S.dollar at the rate of $1 = NIS 0.0003) (the "D
Shares")                                                                                  163,477
7-1/2% Cumulative Redeemable Preference "DD" Shares, par value
NIS 2.10 (linked to the U.S.dollar at the rate of $1 = NIS 0.0021) (the "DD
Shares")                                                                                   55,409
Unclassified Shares, par value NIS.0.10                                                        --

     Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.

                               Yes [_]     No [X]

     IF THIS REPORT IS AN ANNUAL OR TRANSITION REPORT, INDICATE BY CHECK MARK IF
THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.

                               Yes [_]     No [X]

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                               Yes [X]     No [_]

     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer , or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):

  Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]

     Indicate by check mark which financial statement item the registrant has
elected to follow:

                           Item 17 [X]     Item 18 [_]

If this is an annual report, inducate by check mark whether the registrant is a
shell company (as defined in (Rule 12b-2 of the Securities Exchange Act)).

                               Yes [_]     No [X]

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)

     Indicate by check mark whether the registrant has filed all documents and
reports requuired to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                               Yes [_]     No [_]
```

```

                                TABLE OF CONTENTS

Explanatory Notes                                                                            (ii)
Forward-Looking Statements                                                                   (ii)
Industry and Market Data                                                                    (iii)
Presentation of Financial Information                                                       (iii)
Exchange Rate Information                                                                    (iv)
                                     PART I
Item 1 --    Identity of Directors, Senior Management and Advisers                             1
Item 2 --    Offer Statistics and Expected Timetable                                           1
Item 3 --    Key Information                                                                   1
Item 4 --    Information on the Company                                                       22
Item 5 --    Operating and Financial Review and Prospects                                     46
Item 6 --    Directors, Senior Management and Employees                                       67
Item 7 --    Major Shareholders and Related Party Transactions                                81
Item 8 --    Financial Information                                                            85
Item 9 --    The Offer and Listing                                                            90
Item 10 --   Additional Information                                                           92
Item 11 --   Quantitative and Qualitative Disclosures About Market Risk                      109
Item 12 --   Description of Securities Other than Equity Securities                          117
                                    PART II
Item 13 --   Defaults, Dividend Arrearages and Delinquencies                                 118
Item 14 --   Material Modifications to the Rights of Security Holders and Use of Proceeds    121
Item 15 --   Controls and Procedures                                                         122
Item 16A --  Audit Committee Financial Expert                                                123
Item 16B --  Code of Ethics                                                                  123
Item 16C --  Principal Accountant Fees and Services                                          123
Item 16D --  Exemptions from the Listing Standards for Audit Committees                      124
Item 16E --  Purchases of Equity Securities by the Issuer and Affiliated Purchasers          124
                                    PART III
Item 17 --   Financial Statements                                                            125
Item 18 --   Financial Statements                                                            125
Item 19 --   Exhibits                                                                        125

                                       i
```

```

                                EXPLANATORY NOTES

     All references in this annual report on Form 20-F for the period ended
December 31, 2006 (this "Annual Report on Form 20-F") to "Industrial Development
Bank" or "the Bank" as well as use of the terms "we," "us," "our" or similar
terms, are references to Industrial Development Bank of Israel Limited, a
company incorporated under the laws of the State of Israel on October 7, 1957.

                           FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 20-F, including the exhibits incorporated by
reference herein, contains both historical and forward-looking statements within
the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements are not historical facts, but only predictions, and
generally can be identified by the use of statements that include phrases such
as "believe," "expect," "anticipate," "intend," "plan," "foresee" or other words
or phrases of similar import. Similarly, statements that describe our
objectives, plans or goals are also forward-looking statements. These
forward-looking statements are based on our current expectations and are subject
to risks and uncertainties that could cause actual results to differ materially
from those currently anticipated. The forward-looking statements included in
this annual report are made only as of the date hereof and we undertake no
obligation to publicly update these forward-looking statements to reflect new
information, future events or otherwise.

     Our actual results, performance and achievements could differ materially
from any future results, performance or achievements expressly predicted or
implied by these forward looking statements. The important factors which may
cause actual results to differ from the forward-looking statements contained
herein include, but are not limited to, the following: general economic and
business conditions; the continued availability of our special line of credit
from the Bank of Israel; the impact of the Run-Off Plan (as defined below, see
"Item 4. Information on the Company-Business Overview-Adoption of the Run-Off
Plan and Amendment of the Special Line of Credit") on our operations; our
ability to collect on existing loans; operating costs for our remaining business
activities; and the ability to retain employees during the run-off period.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by us or any other
person that our objectives and expectations will be achieved.

     Potential investors and other readers are urged to consider these factors
carefully in evaluating the forward-looking statements, including the factors
described below in "Item 3. Key Information-Risk Factors," and are cautioned not
to place undue reliance on these forward-looking statements. In light of these
risks, uncertainties and assumptions, the forward-looking events might or might
not occur. We cannot assure you that projected results or events will be
achieved.

                                       ii
```

```

                            INDUSTRY AND MARKET DATA

     Industry statistics and market data used in this Annual Report on Form 20-F
were obtained from market research, publicly available information and industry
publications. Industry publications generally state that the information
contained in them has been obtained from sources believed to be reliable, but
that the accuracy and completeness of this information is not guaranteed.
Similarly, industry and market data, while believed to be reliable, have not
been independently verified, and we make no representation as to the accuracy of
this information.

                      PRESENTATION OF FINANCIAL INFORMATION

     We state our financial statements in New Israeli Shekels. In this Annual
Report on Form 20-F, references to New Israeli Shekels, NIS or shekels are to
the currency of Israel, and references to U.S. dollars, $ or US$ are to the
currency of the United States. Our financial statements have been prepared in
accordance with the accounting principles generally accepted in Israel, and in
accordance with the directives of the Supervisor of Banks in Israel ("Israeli
GAAP"). Unless otherwise indicated, the financial information presented is in
accordance with Israeli GAAP. For a discussion of the principal differences
between Israeli GAAP and the accounting principles generally accepted in the
United States, or U.S. GAAP, see "Item 17. Financial Statements".

     The financial statements for the year ending December 31, 2006 were
prepared in "reported amounts," as provided in Standard 12 of the Israel
Accounting Standards Board regarding discontinuance of the adjustment of
financial statements to the Consumer Price Index ("CPI"). Pursuant to this
standard and in accordance with Accounting Standard No. 17 that was published in
December 2002, the adjustment of financial statements to the CPI was
discontinued as of January 1, 2004. Until December 31, 2003, we prepared
CPI-adjusted financial statements in accordance with the directives of the
Supervisor of Banks, on the basis of the principles of Opinion No. 36 of the
Institute of Certified Public Accountants in Israel. The adjusted amounts
presented in the financial statements as of December 31, 2003 are the basis for
the financial statements in reported amounts. Any additions made during the
period are included according to their nominal values. For a further discussion
of the amounts in our financial statements, see "Note 1.C. Financial Statements
in Reported Amounts" to our Financial Statements in Item 17 of this Annual
Report on Form 20-F.

     Unless otherwise indicated, information provided in this Annual Report on
Form 20-F, including all operating data presented, is as of December 31, 2006.

                                      iii
```

```

                            EXCHANGE RATE INFORMATION

     The following table sets forth, for the periods indicated, the average,
high, low and end of period exchange rates between the shekel and the U.S.
dollar, expressed as shekels per U.S. dollar and based upon the daily
representative rate of exchange as published by the Bank of Israel.

                             AVERAGE(1)         HIGH           LOW        PERIOD END
                             ----------         ----           ---        ----------
YEAR ENDED
December 31, 2006             4.4565           4.725          4.176          4.225
December 31, 2005              4.488           4.741          4.299          4.603
December 31, 2004              4.482           4.634          4.308          4.308
December 31, 2003              4.512           4.924          4.283          4.379
December 31, 2002              4.736           4.994          4.437          4.737

                             AVERAGE(2)         HIGH           LOW        PERIOD END
                             ----------         ----           ---        ----------
MONTH ENDED
June 30, 2007                  4.183           4.291          4.062          4.249
May 31, 2007                   4.001           4.065          3.932          4.033
April 30, 2007                 4.072           4.155          4.018          4.024
March 31, 2007                 4.200           4.222          4.155          4.155
February 28, 2007              4.218           4.254          4.153          4.211
January 31, 2007               4.228           4.260          4.187          4.260
December 31, 2006              4.202           4.234          4.176          4.225

----------
(1)  The average of the exchange rates on the last day of each month during the
     applicable year.

(2)  The average of the exchange rates for all days during the applicable month.

     As of July 25, 2007, the exchange rate was NIS 4.221 per U.S. dollar, as
published by the Bank of Israel.

                                       iv
```

```

                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

A.   SELECTED FINANCIAL DATA

     Our financial statements included in this Annual Report on Form 20-F, as
well as the selected financial data presented below, have been prepared in
accordance with Israeli GAAP, including the directives of the Supervisor of
Banks in Israel. For a discussion of the principal differences between Israeli
GAAP and U.S. GAAP, see Item 17 of this Annual Report on Form 20-F.

     Our selected financial data presented below is derived from our audited
financial statements included in Item 17 of this Annual Report on Form 20-F. Our
selected financial data presented below should be read in conjunction with the
information contained in "Item 5. Operating and Financial Review and Prospects"
and the financial statements and notes thereto contained below in "Item 17.
Financial Statements" of this Annual Report on Form 20-F.

                                       1
```

```

                             SELECTED FINANCIAL DATA

                                                                    AS AT DECEMBER 31
                                          ---------------------------------------------------------------------
                                             2006            2005          2004         2003           2002
                                          ----------      ----------    ----------   ----------      ----------
                                                                                                     ADJUSTED
                                                              REPORTED AMOUNTS*                      AMOUNTS**
                                          -----------------------------------------------------      ----------
                                         NIS MILLIONS    NIS MILLIONS  NIS MILLIONS NIS MILLIONS  NIS MILLIONS
                                          ----------      ----------    ----------   ----------      ----------

OPERATING DATA:
ISRAELI GAAP

Profit from financing
 operations before allowance
 for doubtful debts                             18.2            61.6          66.2         70.1            79.5
Allowance for doubtful debts                    21.7            44.2          70.2        129.8           401.8
                                          ----------      ----------    ----------   ----------      ----------
Profit (loss) from financing
 operations after allowance
 for doubtful debts                             (3.5)           17.4          (4.0)       (59.7)         (322.3)
                                          ----------      ----------    ----------   ----------      ----------

OPERATING AND OTHER INCOME -
Operating commissions                            1.3             2.2           4.1          6.5            12.3
Gains (losses) from
 investments in shares                          16.4            11.3          41.5         10.3            (4.2)
Other income                                     3.8             4.7           4.6          5.5             4.1
                                          ----------      ----------    ----------   ----------      ----------
Total operating and other income                21.5            18.2          50.2         22.3            12.2
                                          ----------      ----------    ----------   ----------      ----------

OPERATING AND OTHER EXPENSES -
Salaries and related expenses                   17.6            18.2          19.7         33.7            49.7
Expenses (income) in respect of
 employee retirement                             0.5             5.5          (0.8)        (1.5)           35.7
Maintenance and depreciation
 of buildings and equipment                      2.7             3.8           5.7         11.8            14.7
Other expenses                                  14.3            16.5          20.4         20.7            19.7
                                          ----------      ----------    ----------   ----------      ----------
Total operating and other expenses              35.1            44.0          45.0         64.7           119.8
                                          ----------      ----------    ----------   ----------      ----------

Operating profit (loss)
 before taxes on income                        (17.1)           (8.4)          1.2       (102.1)         (429.9)
Erosions and adjustments***                        -               -             -         (4.5)              -
                                          ----------      ----------    ----------   ----------      ----------
Operating profit (loss)
 before taxes on income                        (17.1)           (8.4)          1.2   **  (106.6)         (429.9)

Provision for taxes on operating
   income (tax benefit)                            -               -             -   **    (2.7)           (0.4)
                                          ----------      ----------    ----------   ----------      ----------
Operating profit (loss) after
 taxes on income                               (17.1)           (8.4)          1.2   **  (103.9)         (429.5)

OTHER ITEMS
Special income from the
 Israeli Treasury                                  -               -             -            -             6.4
Share of Bank in losses of
 Affiliates, net of related taxes                  -               -             -   **    (0.4)           (0.5)
Capital gain (loss), net                           -               -           0.2   **    (0.1)            0.1
                                          ----------      ----------    ----------   ----------      ----------
Total other items                                  -               -           0.2   **    (0.5)            6.0
                                          ----------      ----------    ----------   ----------      ----------
NET EARNINGS (LOSS) FOR THE YEAR               (17.1)           (8.4)          1.4   **  (104.4)         (423.5)
                                          ==========      ==========    ==========   ==========      ==========
NET EARNINGS (LOSS) PER SHARE IN
NIS, ORDINARY A SHARES****                  (1,132.4)         (556.3)         92.7     (6,913.9)      (28,046.4)
                                          ----------      ----------    ----------   ----------      ----------

*    For 2004 and thereafter - discontinuance of inflationary adjustment on the
     basis of the Index of December 2003.

     For 2003 - discontinuance of inflationary adjustment on the basis of the
     Index of December 2002.

**   Amounts adjusted for inflation based on Index of December 2003.

***  Erosions and inflationary adjustments based on the Index of December 2003
     of income and expenses that were included in the operating profit before
     taxes, in reported amounts.

**** The data in respect of prior years was restated. See Note 1.Q to the
     financial statement in Item 17 of this Annual Report.

                                       2
```

```

                                                          2006           2005          2004           2003              2002
                                                        ---------     ----------     ----------     -----------      ----------
                                                         (IN MILLIONS OF NIS, EXCEPT PER SHARE DATA AND EXCEPT AS OTHERWISE
                                                                                       INDICATED)
                                                                                                                      ADJUSTED
                                                                          REPORTED AMOUNTS                            AMOUNTS
                                                        -------------------------------------------------------      ----------
U.S. GAAP
Net profit (loss) for the year                             (64.9)          17.1          (20.0)         (157.2)         (334.0)

                                                           NIS           NIS            NIS            NIS               NIS
                                                        ---------     ----------     ----------     -----------      ----------

Loss per Ordinary A Shares                              (2,936.4)     (3,983.55)     (3,019.28)     (10,579.77)      (9,603.09)

BALANCE SHEET DATA:
ISRAELI GAAP

Deposits received                                          6,923          8,110          8,488           9,742          11,474
Registered Subordinated Capital Notes                         25             27             25              28              35
Total Liabilities, not including Preference shares         7,006          8,193          8,570           9,847          11,665
Non-participating Preference shares                          303            330            309             314             334
Participating Preference shares*                             187              -              -               -               -
Shareholders' equity*                                         20            197            199             196             276
Loans extended                                             6,519          7,681          7,993           9,190          10,908
Deposits with the Israeli Treasury                           840            853            843             835             871
Credit to foreign government                                   2              7             11              21              82
Amounts receivable from the Israel Treasury in
      respect of linkage increments and exchange
      differences on the Bank's liabilities                   25             27             25              28              35
Total Assets                                               7,516          8,721          9,078          10,356          12,274

*    See Note 1D to the financial statements in

     Item 17 of this Annual Report on Form 20-F

                                       3
```

```

                            2006          2005         2004         2003          2002
                            ----          ----         ----         ----          ----
                        (IN MILLIONS OF NIS, EXCEPT PER SHARE DATA AND EXCEPT AS OTHERWISE
                                                     INDICATED)
                                                                               ADJUSTED
                                           REPORTED AMOUNTS                     AMOUNTS
                            --------------------------------------------          ----

BALANCE SHEET DATA:
U.S. GAAP
Total Assets                7,778        9,056        9,443        10,830        12,929
Total Liabilities           7,551        8,762        9,168        10,525        12,472
Shareholders' equity          227          294          275           305           457

B.   CAPITALIZATION AND INDEBTEDNESS

     Not applicable.

C.   REASONS FOR THE OFFER AND USE OF PROCEEDS

     Not applicable.

D.   RISK FACTORS

     This section describes some of the risks that could affect our business.
The factors below should be considered in connection with any forward-looking
statements in this Annual Report on Form 20-F.

     The risks below are not the only ones that we face; some risks are not yet
known to us and some that we do not currently believe to be material could later
turn out to be material. All of these risks could materially affect our
business, our revenues, operating income, net income, net assets, liquidity and
capital resources and the value of our securities.

     WE HAVE ADOPTED A RUN-OFF PLAN PURSUANT TO WHICH OUR OPERATIONS WILL BE
WOUND DOWN DURING THE RUN-OFF PERIOD, WHICH EXPIRES IN 2008.

     After experiencing a severe liquidity crisis in 2002 and an unsuccessful
attempt to sell our assets and liabilities thereafter, our Board of Directors
adopted a run-off plan on February 27, 2003, which plan was approved, with
certain modifications, by the Ministerial Committee for Social and Economic
Affairs of the Government of Israel on July 29, 2003. Pursuant to the terms of
the Run-Off Plan (as defined below; see "Item 4. Information on the
Company-Business Overview-Adoption of the Run-Off Plan and Amendment of the
Special Line of Credit") and the governmental approval thereof, our assets were
to be realized in a controlled manner over a defined period of time not to
exceed thirty-six (36) months from July 29, 2003. On July 26, 2005 our Board of
Directors decided to extend the Run-Off Plan until July 31, 2008 and its
decision was approved by the above government committee on October 10, 2005.

                                       4
```

```

     The terms of the Run-Off Plan under which we are currently operating
severely curtail our banking operations. We are precluded from extending new
loans to customers or undertaking new banking activities during the run-off
period; our operations during the run-off period will be focused on the
collection of existing loans.

     During the run-off period, we may use the special line of credit from the
Bank of Israel solely for the bridging of our liquidity needs as required for
the fulfillment of our current and banking undertakings. The special line of
credit from the Bank of Israel, which contains substantial conditions affecting
our operations, is discussed further below and in "Item 4. Information on the
Company - Business Overview." Our ultimate goals during the run-off period are
to realize our assets and repay the special line of credit from the Bank of
Israel.

     In the audit report relating to our financial statements for our fiscal
year ended December 31, 2006 included in this Annual Report on Form 20-F, our
independent public accountants, KPMG, stated that our ability to repay our
liabilities is contingent upon the continuation of the special line of credit
from the Bank of Israel and implementation of the Run-Off Plan, in addition to
the continued forebearance by the Bank of Israel.

     OUR BANKING LICENSE HAS BEEN RESTRICTED AND IT WILL EXPIRE AS OF AUGUST 1,
2008.

     In his letter dated January 29, 2006, we were notified by the Governor of
the Bank of Israel, that the banking license that we received on June 4, 1989
will be restricted so that we cannot engage in any business we did not engage in
prior to the date of the license (until the date of the license we engaged in
financing investments) and without derogating from the generality of the
aforementioned, we will not receive new deposits and will not renew deposits
reaching their current date of maturity, other than from shareholders. The
Governor added that our banking license will be revoked as of August 1, 2008.

     In a subsequent letter dated May 1, 2007, the Governor of the Bank of
Israel notified us that if the proposed plan for the sale and/or transfer of the
Bank's shares (see "Item 4. Information on the Company-Business Overview-Current
Operations under the Run-Off Plan") is implemented prior to August 1, 2008, our
banking license will be revoked at the date of the implementation of the
outline.

                                       5
```

```

     IF THE PLAN FOR THE SALE OF THE SHARES OF THE BANK IS IMPLEMENTED, OUR C
SHARES, OUR CC SHARES, OUR CC1 SHARES, OUR D SHARES AND OUR DD SHARES, WILL BE
PURCHASED AND/OR REDEEMED DESPITE THE OBJECTION OF SOME SHAREHOLDERS.

     The Ministry of Finance and the Government Companies Authority are
examining a possible Plan for the sale and/or transfer of all of our issued and
paid share capital to a third party, in three steps: (a) sale and/or transfer of
all of the Bank's securities held by the State and the three large banking
groups to a designated purchaser; (b) the purchase by the designated purchaser
of the Bank's shares publicly traded on the Tel Aviv Stock Exchange (the Bank's
C Shares, CC Shares, and CC1 Shares), within the framework of an arrangement
pursuant to Section 350 of the Companies Law, 1999 (Israel) (the "Companies
Law") which would require court approval and the approval of a special majority
of the Bank's public shareholders; and, (c) the redemption by the Bank of the D
Shares and the DD Shares held by the public, including the payment of their
accrued preferred dividends (as required by the terms of their offering in the
event of their redemption). If the above outline for the sale of our shares is
approved and implemented by the required majority-vote, the purchase and/or
redemption of these shares as described above will be carried out even without
the consent of certain shareholders.

     Additional details regarding the proposed sale of our shares were included
in our disclosure on Form 6-K filed with the SEC on June 19, 2007 which is
incorporated herein by reference.

     UPON THE EXPIRATION OF THE RUN-OFF PERIOD, IT IS UNCLEAR IF WE WILL
CONTINUE TO OPERATE AND, IF WE DO CONTINUE TO OPERATE, IN WHAT FORM WE WILL
CONDUCT OUR OPERATIONS; WE MAY, HOWEVER, CEASE OPERATIONS AT THE END OF THE
RUN-OFF PERIOD AND, IF WE CEASE OPERATIONS, IT IS UNCLEAR WHAT OUR LEGAL STATUS
WILL BE.

     According to the Run-Off Plan approved by the Government, the run-off
period expires in July 2008. Pursuant to the notice given by the Governor of the
Bank of Israel, our banking license will expire on August 1, 2008. At the
present time, it is unclear what our status will be upon expiration of the
run-off period. Upon the expiration of our banking license, we will cease to
operate as a banking entity and it is unclear if we will then continue to
operate, and if so, how.There are many factors to be considered in connection
with our ultimate status following the run-off period, including, without
limitation, the amount of remaining loans outstanding as of the expiration of
the run-off period, and the input of the Government of Israel, which has assumed
responsibility for the special line of credit extended by the Bank of Israel, in
exchange for which the floating lien that we provided for repayment of the
credit will be assigned in its favor. It is our understanding that the
Government's assuming responsibility for the repayment of the balance of the
special line of credit does not derogate from our primary obligation to repay
the outstanding balance to the Bank of Israel.

     If the Government of Israel decides to implement the proposed sale/
redemption plan described above, such sale may be consummated even prior to the
expected Run-Off Plan termination date, July 31, 2008, in which case our banking
license will be revoked at the date of the implementation of the sale. It is
unclear whether we will continue to operate after such sale and what the nature
of such operations might be.

     We expect that the Government of Israel will ultimately decide what our
status will be upon expiration of the run-off period. We do not know when the
Government of Israel will make a definitive decision with respect to our status
after the expiration of the run-off period or the proposed sale/redemption plan.
We note, however, that our status at the expiration of the run-off period is
uncertain and that we may cease operations at that time.

     The financial statements included in Item 17 do not include any adjustments
that may result from the outcome of the above uncertainty.

                                       6
```

```

     IN ACCORDANCE WITH THE RUN-OFF PLAN AND THE NOTICE OF THE GOVERNOR OF THE
BANK OF ISRAEL REGARDING THE RESTRICTION OF OUR BANKING LICENSE, WE HAVE
SUBSTANTIALLY TERMINATED THOSE BANKING OPERATIONS THAT DO NOT RELATE TO THE
COLLECTION OF EXISTING LOANS.

     The Run-Off Plan and the notice of the Governor of the Bank of Israel
regarding the restriction of our banking license severely limit our banking
operations. We are precluded from extending new loans to customers or from
receiving or renewing deposits or otherwise generating new business. We have
substantially reduced, and we will continue to reduce, the volume of our
remaining operations. Until the expiration of the run-off period, we do not
anticipate having any new operating activities.

     Our inability to extend new loans to customers or to receive or renew
deposits or otherwise generate new business has had, and will continue to have,
an adverse effect on our ability to generate profits during the run-off period.

     WE HAVE SUSPENDED THE PAYMENT OF DIVIDENDS ON OUR C SHARES, OUR CC SHARES,
OUR CC1 SHARES, OUR D SHARES AND OUR DD SHARES, AS WELL AS ON OUR OTHER CLASSES
OF SHARES. THE SUSPENSION OF THE PAYMENT OF DIVIDENDS ON THOSE SHARES MAY
CONTINUE FOR AN INDEFINITE PERIOD OF TIME AND, IN THE FUTURE, WE MAY NOT BE ABLE
TO PAY ANY DIVIDENDS ON THOSE SHARES.

     According to the Companies Law, a company may distribute dividends only
from its profits (adjusted to changes in the CPI). Under certain circumstances,
however, a company may seek court approval to pay dividends even in the absence
of profits. Under the Directives of Proper Banking Procedures, the Supervisor of
Banks has prohibited banking corporations from distributing dividends if, among
other things, such banking corporations have losses in one or more of the
previous three calendar years or if the aggregate results of three quarters
ending in the interim period for which the previous interim financial statements
were issued reflect a loss.

     We ended the year 2004 with a modest profit and 2005 and 2006 with losses
and, beginning in the first quarter of 2002, we have not had profits from which
we could distribute dividends. The last quarterly dividend that we paid in
respect of our C Shares, our CC Shares, our CC1 Shares, our D Shares and our DD
Shares was the dividend for the second quarter of 2002, which payment of
dividends was made with court approval and approval of the Supervisor of Banks.
In accordance with our Articles we can distribute a dividend only out of
earnings of the Bank. As from the second quarter of 2002 the Bank does not even
have any nominal earnings.

     We deposited the proceeds of the issuances of our C Shares, our CC Shares,
our CC1 Shares, our D Shares and our DD Shares, with the Ministry of Finance of
the State of Israel pursuant to deposit agreements. In our financial statements,
we refer to those deposits with the Ministry of Finance as the perpetual
deposits. According to the deposit agreements, our perpetual deposits with the
Ministry of Finance earn interest at a rate of 7.5% per annum (plus
differentials of linkage to the U.S. dollar), which interest must be paid by the
Ministry of Finance to us on the payment dates for the dividends to be paid by
us on our C Shares, our CC Shares, our CC1 Shares, our D Shares and our DD
Shares.

                                       7
```

```

     When we ceased making dividend payments on our C shares, CC shares, CC1
Shares, D Shares and DD Shares, the Ministry of Finance also ceased making the
interest payments on the perpetual deposits to us. The last interest payment
that we have received from the Ministry of Finance was for the second quarter of
2002. The deposit agreements do not expressly stipulate how the interest on our
perpetual deposits with the Ministry of Finance should be handled during periods
in which we are prevented from distributing dividends on our C Shares, our CC
Shares, our CC1 Shares, our D Shares and our DD Shares, and whether the interest
will accrue and be paid if we ultimately pay accrued dividends on such shares in
arrears or upon liquidation.

     If the interest due under the deposit agreements is accruing and will
ultimately be paid to us by the Ministry of Finance if we pay accrued and unpaid
dividends or if we are liquidated, then such interest will be paid to us at that
time. However, there is no assurance that the interest is accruing or that we
will have sufficient net profits to permit the payment of dividends or that if
we do have sufficient net profits, the Supervisor of Banks will permit us to
make dividend payments.

     The aggregate amount of the accrued and unpaid dividends in respect of our
C Shares, our CC Shares, our CC1 Shares, our D Shares and our DD Shares
(including a 1.5% participating dividend for C, CC and CC1 shares) as of
December 31, 2006 is NIS 167.0 million, which amount is not recorded in our
financial statements. Of this amount, an amount of NIS 36.81 million is in
respect of the fiscal year 2006. The aggregate amount of interest that may or
may not be accruing to us pursuant to the deposit agreements as of December 31,
2006 is also NIS 167.0 million, which amount is also not recorded in our
financial statements. The non-recording of the above amounts in our financial
statements is due to the present uncertainty concerning their eventual payment.
As of March 31, 2007, the aggregate amount of the accrued and unpaid dividends
in respect of the above shares is approximately NIS 172.5 million.

     On September 28, 2004, various financial entities that hold our class C,
class CC and/or class CC1 Shares filed with the Tel Aviv District Court an
originating motion in which the Court was requested to instruct us to pay to our
shareholders back dividends at the same rate and relevant quarterly dates as was
paid until we last paid a dividend for the second quarter of 2002.

     Our Board of Directors believes the aformentioned matter relating to
dividends is related to the question of whether, under the circumstances of a
non-distribution of dividends, interest on the perpetual deposits of the Bank
with the Israeli Treasury accrues in favor of the Bank. Since the responses
received at the time from the Ministry of Finance in this matter have been
unclear and insufficient, we filed an originating motion with the Tel Aviv
District Court seeking a declaratory judgment against the State and the
aformentioned financial entities which would provide that the interest on the
perpetual deposits is indeed accrued in favor of the Bank, as is the position of
our Board of Directors on this matter. Following the motion filed by us and by
the aforementioned financial entities, the Court ordered that the hearing on the
two originating motions be consolidated. In the reply of the Minister of Finance
to the originating motions prior to a preliminary hearing that was held on
January 12, 2006, the Minister of Finance announced that his position is that
the interest on the perpetual deposits does not accrue in our favor when we do
not distribute a dividend, and that in any event, in light of our circumstances,
there is no justification for our distributing a dividend. On March 23, 2006,
the Court ruled that it will first consider the issue of the accrual of the
interest on our deposits with the Treasury, since the decision on this issue
will advance the proceeding and the decisions regarding the other relevant
issues. In January 2007, the parties completed their arguments on this first
issue; however the Court has yet to give its ruling. The fundamental position of
our Board of Directors is that if it is ruled that the interest does not accrue
on the perpetual deposits, the Board of Directors will reconsider its position
regarding renewal of the dividend distribution, subject to the legal and
regulatory restrictions applicable to the Bank in this respect, including the
need to receive approvals and to amend our Articles of Association.

                                       8
```

```

     See Notes 16 and 21 to the financial statements in Item 17 of this Annual
Report on Form 20-F for additional details regarding this originating motion,
the cessation of dividend distribution and the matter of the accrued interest on
the perpetual deposits with the Israeli Treasury.

     Under the circumstances, it is unclear when or if the payment of dividends
will be resumed. We do not know when a definitive decision with respect to the
accrual of interest under the deposit agreements will be made.

     TO CONTINUE OUR LIMITED OPERATIONS DURING THE RUN-OFF PERIOD, WE ARE
DEPENDENT ON A SPECIAL LINE OF CREDIT EXTENDED BY THE BANK OF ISRAEL.

     In August 2002, as a result of the liquidity crisis we experienced at that
time, we started drawing on our account with the Bank of Israel. The Governor of
the Bank of Israel had notified us on September 9, 2002 of his decision to
extend to us a special line of credit, in order to permit us to continue our
ongoing operations, and the line was actually granted on November 14, 2002. In
connection with the governmental approval of the Run-Off Plan in July 2003 and
its extension of the plan in October 2005, the special line of credit extended
by the Bank of Israel was amended and restated to provide funding for us
throughout the run-off period, subject to certain covenants and commitments. In
accordance with the governmental approval of the Run-Off Plan, the Government of
Israel has: (1) assumed responsibility for the repayment of the special line of
credit as of July 1, 2005, subject to the condition that the interest on the
special line of credit will not exceed, until the expiration of the Run-Off
Plan, the "Bank of Israel's Interest Rate"; and (2) undertaken that if upon the
expiration of the Run-Off Plan, there shall remain an unpaid balance of the
special line of credit, the government will repay such balance to the Bank of
Israel by July 31, 2008. See "Item 4. Information on the Company-Business
Overview" below for a discussion of the terms of the special line of credit from
the Bank of Israel.

     In accordance with the Run-Off Plan under which we are currently operating,
we are precluded from extending new loans to customers during the run-off
period. Our activities during the run-off period focus on the collection of
existing loans. In addition, the terms of the special line of credit impose
significant restrictive operating covenants on us, and following the notice from
the Governor of the Bank of Israel from January 29, 2006 regarding the
limitation of our banking license, we are precluded from carrying on business
activities which we did not engage in prior to the granting of our license (June
4, 1989). In addition to the aforementioned restrictions, we are precluded from
receiving or renewing deposits. Our failure to comply with the covenants
contained in our special line of credit could result in an event of default or a
termination of the special line of credit, either of which could materially and
adversely affect our operating results and our financial condition.

                                       9
```

```

     If the special line of credit from the Bank of Israel were to be
terminated, then, in the absence of any alternative liquidity source, we would
not be able to continue any operations during the run-off period.

     WE ARE SUBJECT TO A NUMBER OF BANKING REGULATIONS IN ISRAEL; CHANGES IN THE
REGULATORY FRAMEWORK IN ISRAEL COULD ADVERSELY AFFECT OUR BUSINESS.

     A number of banking regulations designed to maintain the safety and
soundness of banks and limit their exposure to risk apply in Israel. Changes in
regulations, which are beyond our control, may have a material effect on our
remaining business and operations during the run-off period. No assurance can be
given generally that laws or regulations will be adopted, enforced or
interpreted in a manner that will not have an adverse effect on our remaining
business.

     IN CONNECTION WITH THE RUN-OFF PLAN, OUR BANKING LICENSE MAY BE FURTHER
LIMITED BY THE BANK OF ISRAEL.

     In the letter of the Governor of the Bank of Israel dated October 30, 2005
regarding the extension of the special line of credit until the end of the
extended Run-Off Plan (July 31, 2008), it was noted that if the Bank of Israel
should see fit, and to the extent required at its sole discretion, additional
restrictions regarding our operations will be considered, whether or not as a
result of non-conformity with the objectives of the Run-Off Plan.

     Any further limitation on our business activities could have a material
adverse effect on our remaining business, financial condition or results of
operations.

     WE ARE SUBJECT TO CREDIT RISK.

     We are subject to credit risk, I.E., the risk that our borrowers and other
counterparties may become unable to meet their payment obligations to us. Risks
arising from changes in credit quality and the recoverability of loans and
amounts due from counterparties are inherent in a wide range of our businesses.
Adverse changes in the credit quality of our borrowers and counterparties or a
general deterioration in Israeli or global economic conditions, or arising from
systemic risks in the financial systems, could affect the recoverability and
value of our assets and require an increase in the provision for bad and
doubtful debts and other provisions.

     Although we regularly review our exposure to specific borrowers and other
counterparties whom we believe present special concerns, defaults may arise from
events and circumstances that are difficult or impossible to predict or detect.
In addition, the value of any collateral we hold may deteriorate, for example,
as a result of sudden market declines. Accordingly, if a major borrower or other
counterparty were to default on its obligations, our results of operations and
financial condition could suffer.

     As stated above, our main operations during the run-off period relate to
the collection of existing loans. Credit risk is, therefore, a substantial risk
during the run-off period because our ability to collect on existing loans will
affect our financial results.

                                       10
```

```

     BECAUSE WE HAVE ADOPTED A RUN-OFF PLAN, IT IS POSSIBLE THAT OUR CREDIT RISK
MAY BE INCREASED; WE ARE SPENDING MORE ON COLLECTION OF DEBTS AND LITIGATION
RELATING TO SUCH COLLECTION DURING THE RUN-OFF PERIOD.

     We believe that some borrowers and other counterparties may try to avoid
honoring their obligations to us because of our present financial situation.
Because we are in a run-off period, borrowers and counterparties do not expect
to have a long-term relationship with us and they may be more likely to seek
concessions from us with respect to their debts. In addition, borrowers and
counterparties may believe that we will not aggressively collect on our existing
loans because we are operating pursuant to a run-off plan. As a result,
borrowers and counterparties may be less likely to pay their debts to us and
there is an increased credit risk for us.

     We intend to diligently collect our existing loans and, in connection
therewith, we may commence litigation with respect to those collections if
necessary. As a result, we may have more expenses in connection with collecting
existing loans during the run-off period.

     WE MAY SUFFER ADDITIONAL LOSSES IN THE FUTURE DUE TO PROBLEM LOANS.

     We have a substantial volume of problem loans and loans that may become
problem loans. Some of our borrowers may face increasingly challenging
circumstances. Our problem loans and credit-related expenses could increase if:
(a) economic conditions in Israel deteriorate; (b) real estate prices or stock
prices in Israel decline; (c) the rate of corporate bankruptcies in Israel
rises; (d) our large borrowers become insolvent or must be restructured; (e)
additional economic problems arise elsewhere in the world; or (f) the global
economic environment deteriorates generally.

     An increase in problem loans and credit-related expenses would adversely
affect our remaining operations, would weaken our financial condition and would
erode our capital base.

OUR ALLOWANCE FOR DOUBTFUL DEBTS MAY BE INSUFFICIENT TO COVER LOSSES INHERENT IN
THE LOAN PORTFOLIO.

     Our allowance for doubtful debts in our loan portfolio is based, among
other things, on assumptions and estimates about our customers, the value of
collateral we hold and the economy as a whole and provides a reserve against
losses inherent in loans. Estimating losses, however, is inherently uncertain
and depends on many factors, including general economic conditions, changes in
our appraisal of the financial standing of our borrowers and other
counterparties, structural changes in industries that alter the competitive
positions of the companies operating in these industries as well as other
external factors, such as legal and regulatory requirements.

     Our actual loan losses could prove to be materially different from our
estimates and could materially exceed our allowance. If our actual loan losses
are higher than we currently expect, our current allowance for doubtful debts
will be insufficient. If general economic conditions deteriorate, causing us to
change some of our assumptions and estimates, if the value of collateral we hold
declines or if we are adversely affected by other factors to an extent that is
worse than anticipated, we may have to provide for additional allowance for
doubtful debts.

                                       11
```

```

     OUR RECOVERIES FROM TROUBLED BORROWERS MAY BE LOWER THAN EXPECTED.

     We may forbear from exercising some or all of our rights as a creditor
against troubled borrowers, and we may forgive loans to them in conjunction with
their debt restructuring. Even when our legal rights might permit us to take
stronger action against the borrower and even when others might take stronger
action against the borrower, we may take other steps in order to maximize
recovery or to reduce exposure in the short term.

     WE MAY EXPERIENCE LOSSES BECAUSE OUR REMEDIES FOR CREDIT DEFAULTS BY OUR
BORROWERS ARE LIMITED.

     We may not be able to realize the value of collateral we hold or enforce
our rights against defaulting customers because of the difficulty of foreclosing
on collateral and/or the depressed value of collateral.

     SINCE OUR LOAN PORTFOLIO IS CONCENTRATED IN ISRAEL, ADVERSE CHANGES
AFFECTING THE ISRAELI ECONOMY COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

     Our loan portfolio is concentrated in Israel. As of December 31, 2006,
nearly 100% of our loans were made to Israeli resident borrowers. Therefore,
adverse changes affecting the Israeli economy would likely have a significant
adverse impact on our loan portfolio and, as a result, on our financial
condition, cash flows and results of operations.

     THE ISRAELI ECONOMY CAN BE DIRECTLY AND NEGATIVELY AFFECTED BY ADVERSE
DEVELOPMENTS IN OTHER COUNTRIES.

     Financial and securities markets in Israel are, to varying degrees,
influenced by geopolitical, economic and market conditions in other countries.
Negative developments in the geopolitical environment, the economy or securities
markets in other countries may have a negative impact on the Israeli economy.
These developments may adversely affect our remaining business, financial
condition and operating results.

     EVEN WITH OUR LIMITED BANKING ACTIVITIES DURING THE RUN-OFF PERIOD, WE ARE
SUBJECT TO CERTAIN RISKS TYPICAL OF BANKING ACTIVITIES, SUCH AS MARKET RISK,
INTEREST RATE RISK AND CURRENCY RISK.

     We are subject to the risks typical of banking activities, such as
fluctuations in the prevailing levels of interest rates and exchange rates and
capital market volatility. For more information on these risks, see "Item 11.
Quantitative and Qualitative Disclosures About Market Risk" below.

     DIFFERENT DISCLOSURES AND ACCOUNTING PRINCIPLES BETWEEN ISRAEL AND THE
UNITED STATES MAY PROVIDE YOU WITH DIFFERENT OR LESS INFORMATION ABOUT US THAN
YOU EXPECT.

     There may be less publicly available information about us than is regularly
published about companies in the United States. While we are subject to the
periodic reporting requirements of the U.S. Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the disclosure required from foreign issuers under
the Exchange Act is more limited than the disclosure required from U.S. issuers.
Additionally, we present our financial statements under Israeli GAAP which
differs from U.S. GAAP. For the discussion of the differences between Israeli
GAAP and U.S. GAAP, see "Item 17. Financial Statements."

                                       12
```

```

     OUR MANAGEMENT HAS IDENTIFIED CERTAIN ISSUES RELATING TO THE PROCESSING AND
REPORTING OF INFORMATION AS REQUIRED BY THE RULES AND REGULATIONS OF THE U.S.
SECURITIES AND EXCHANGE COMMISSION, AS DESCRIBED MORE FULLY IN ITEM 15.

     Our management has concluded that our disclosure controls and procedures
were, as of the end of the period covered by this Annual Report on Form 20-F,
effective to provide reasonable assurance that information required to be
disclosed by us is recorded, processed, summarized, reported and communicated to
our management as appropriate to allow timely decisions regarding required
disclosure. In reaching that conclusion, our management identified certain
issues relating to the processing and reporting of information, as discussed
below in Item 15. One of those issues mentioned in Item 15 is that our system of
financial reporting was not designed to reconcile our financial statements
(which are prepared in accordance with Israeli GAAP) with U.S. GAAP in
accordance with the requirements of Form 20-F. To address this issue, our
accounting personnel have outlined the issues relevant to the reconciliation of
our financial statements to U.S. GAAP and the methods of preparing such a
reconciliation. In addition, we have retained U.S. counsel to advise us as to
the requirements of Form 20-F and related U.S. Securities and Exchange
Commission ("SEC") rules and regulations. In preparing the reconciliation of our
financial statements, our accounting personnel are guided by the experience they
acquired in the reconciliation of previous annual reports. Our accounting
personnel regularly consult with, and seek the assistance of, outside accounting
advisors in connection with the required reconciliation of our financial
statements to U.S. GAAP. Moreover, they periodically seek from such outside
accounting advisors relevant updates regarding SEC and PCAOB rules and
regulations relating to reconciliation to U.S. GAAP. A discussion of these and
other issues can also be found in Item 15.

     However, we cannot assure you that the measures we have taken to date or
any future measures will remediate the above issues or those identified in Item
15 of our Annual Report on Form 20-F. In addition, we cannot assure you that
additional issues will not be discovered in the future. Any failure to remediate
the above issues or those identified in Item 15 could cause us to fail to meet
our reporting obligations.

OUR ABILITY TO CONTROL THE DIVERSIFICATION OF OUR CREDIT RISKS IS ALMOST
NONEXISTENT.

     As aforementioned, in accordance with the policy we adopted in the
framework of the Run-Off Plan, we no longer provide credit. We presently engage
in collecting credit provided in the past, and we are working on reaching debt
arrangements as part of this process.

     The ability to collect credit is also affected by matters that are external
to the Bank, such as the condition of the economy in general and of the
borrowers in particular, and the policy of other banks with respect to the
provision of credit to customers.

                                       13
```

```

     As of December 31, 2006, the balance of credit to the public amounts to NIS
6,519 million. This credit includes credit in the amount of NIS 5,671 million to
the Israel Electric Corporation Ltd. for which a State guarantee was received as
collateral. Net of this credit the balance of credit to the public amounts to
NIS 848 million. The fact that we have refrained from providing new credit for
more than four years has reduced our ability to diversify our credit risks in
accordance with credit risk diversification accepted parameters to a minimum as
described below (numbers discussed are net of the credit to Israel Electric
Corporation Ltd.):

     DIVERSIFICATION OVER ECONOMIC SECTORS - Our industrial credit constitutes
38% of the balance sheet credit balance compared with 15% of the total
industrial credit of Israeli banks in general (not including mortgage banks).
Our balance sheet credit to various commerce sectors constitutes 3.4% of the
credit compared with 9.2% of the credit to various commerce sectors of ordinary
banks. Our credit to private households amounts to an insignificant rate of 0.5%
compared with 22.8% of the credit to private households of ordinary banks. The
comparative data of the banking system is for December 31, 2005.

     The aforementioned shows that the rate of our industrial credit is
significantly higher than the accepted rate of the banking system and that the
level of diversification of credit over economic sectors is lower than that
accepted in the banking system, with this being particularly prominent in
respect of the credit to private households.

     DIVERSIFICATION OF CREDIT ACCORDING TO SIZE OF BORROWER - As at December
31, 2006, the overall credit risk of the borrowers, net of the credit to the
Israel Electric Corporation Ltd., which is guaranteed by the State of Israel,
amounts to NIS 1,084 million. The overall credit risk in respect of the our
eight largest borrowers amounts to NIS 398 million and constitutes 37% of the
credit balance.

     Pursuant to data for the year-end 2005, the weight of the thirteen largest
borrowers in the five largest banking groups in Israel constitutes 3.0% of the
overall credit risk of these banking groups. Hence, compared to the norm in the
banking system, we have a higher degree of concentration of credit to large
borrowers.

     CREDIT TO PROBLEMATIC BORROWERS - The total balance sheet credit of the
borrowers whose debt is classified as problematic amounts to NIS 495 million,
constituting 58% of the balance sheet credit, compared with 9% in the five
largest banking groups (as at September 2006). The balance of the debt
classified as non-income bearing amounts to NIS 171 million, about 20% of the
balance sheet credit, compared with 2.1% in the five largest banking groups. The
high weight of our problematic debts compared with that of the five largest
banking groups is due to, INTER ALIA, our being engaged in the collection of
credit for more than four years and not providing any new credit. Also, because
collecting credit from problematic customers is slower than collecting from
other customers, the weight of the problematic debts has risen over the years.

     As aforementioned, our ability to control the diversification of the credit
risks described above is almost nonexistent.

                                       14
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```

     VOLATILITY IN THE PRICES OF MARKETABLE SHARES, PARTICULARLY OF ONE COMPANY,
MAY NEGATIVELY AFFECT OUR INVESTMENT PORTFOLIO.

     The volume of our investment in securities, as of December 31, 2006,
amounted to NIS 50 million, of which NIS 33 million is invested in marketable
securities. This value is based on the market price of the securities as of the
balance sheet date. The value is subject to the volatility of the prices of the
shares included in this item. Most of the investment in marketable securities
(NIS 31.7 million) is in shares of one company which is included in the Tel Aviv
25 Index.

     VARIOUS LEGAL RISKS ARE INHERENT IN OUR BUSINESS

     In the course of our activities we are exposed to legal risks, including
the risk of incurring a loss as a result of there being no possibility of
legally enforcing the execution or performance of an agreement. These risks are
handled on a regular basis by our legal department, but this cannot ensure that
all the risks were taken into account or that identified risks will not
materialize in the future.

     VOLATILITY IN INTEREST RATES MAY NEGATIVELY AFFECT OUR NET INTEREST INCOME
AND INCREASE OUR NON-PERFORMING LOAN PORTFOLIO.

     Changes in market interest rates could affect the interest rates charged on
the interest-earning assets differently than the interest rates paid on
interest-bearing liabilities. Our special line of credit from the Bank of
Israel, which is our main source of liquidity, bears interest at the Bank of
Israel rate. Any increases in the Bank of Israel rate would result in an
increase in our interest expenses relative to interest income, which would
result in a reduction in our net interest income. Since a substantial part of
our loan portfolio reprices in less than one year, rising interest rates may
also bring about an increase in the volume of problem loans. Interest rates are
highly sensitive to many factors beyond our control, including deregulation of
the financial sector, monetary policies, domestic and international economic and
political conditions and other factors.

     FOREIGN EXCHANGE RATE FLUCTUATIONS MAY NEGATIVELY AFFECT OUR EARNINGS AND
THE VALUE OF OUR ASSETS AND SHARES.

     If a significant devaluation of the Israeli currency were to occur at a
time when we had a substantial surplus in our liabilities in foreign currencies
(including those linked to foreign currencies), we may experience a substantial
adverse effect on our financial results. See "Item 11. Quantitative and
Qualitative Disclosure of Market Risk" for a detailed discussion of market
risks.

     OUR REMAINING OPERATIONAL RISKS ARE INHERENT IN OUR BUSINESS.

     Our remaining business activities are dependent on the ability to process
transactions efficiently and accurately. Operational risks and losses can result
from fraud, errors by employees, failure to document transactions properly or to
obtain proper internal authorization, failure to comply with regulatory
requirements and rules, equipment failures, natural disasters or the failure of
external systems, of our suppliers or counterparties. Although we have
implemented risk controls and we devote substantial resources to developing
efficient procedures, we cannot be absolutely certain that such procedures will
be effective in controlling each of the operational risks we face.

                                       15
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```

     THERE IS CURRENTLY NO ESTABLISHED TRADING MARKET IN THE UNITED STATES FOR
ANY OF OUR SECURITIES.

     There can be no assurance as to (a) the liquidity of any market that may
develop for our securities in the United States or elsewhere, (b) the ability of
the holders of the securities to sell them in the United States or elsewhere or
(c) the prices at which any sales of our securities may be made. Some of our
securities are listed on the Tel Aviv Stock Exchange.

     WE HAVE DRAMATICALLY REDUCED THE NUMBER OF OUR EMPLOYEES; WE RELY ON OUR
REMAINING EMPLOYEES TO ASSIST US THROUGHOUT THE RUN-OFF PERIOD.

     In accordance with the terms of the Run-Off Plan, we have dramatically
reduced the number of our employees. Our ability to operate under the Run-Off
Plan during the run-off period depends to a large extent upon the continued
services of our remaining senior management and employees. The loss of the
services of our remaining personnel could have a material adverse effect on our
business, financial condition or results of operations and our ability to
function throughout the run-off period.

     OUR INDEBTEDNESS FOR OUR CAPITAL NOTES IS SUBORDINATED AND UNSECURED .

     In 1974, we issued U.S.$ 50 million subordinated capital notes bearing
interest at an annual rate of 7.5%. Under their terms, subject to the provisions
of the following paragraph, the capital notes are redeemable at the election of
the holder beginning on December 31, 1998 and, thereafter, every 18 months, and
at our election at any time after January 1, 1981.

     The capital notes are perpetual. The outstanding principal amount of the
capital notes is payable at certain enumerated times at the option of the
holder. The holder of capital notes, in order to receive payment of the
outstanding principal amount of the capital notes, must deliver the capital
notes for cancellation to the agent designated by us together with a written
demand for payment. The first date on which the outstanding principal amount
could be paid to holders who submitted the notes and the written demand was
December 31, 1998. After December 31, 1998, the holders of capital notes are
able to submit notes and written demands to obtain payment of the outstanding
principal amount every 18 months until all of the capital notes are paid off.
The holders must deliver their notes and written demands at least 30 days prior
to the date of payment.

     The principal amount of our outstanding capital notes as of June 30, 2007
was $5,684,245.

     We deposited the proceeds of the issuance of the capital notes with the
Ministry of Finance of the State of Israel pursuant to a deposit agreement.
According to the deposit agreement, the deposit earns interest at the annual
rate of 7.5%, payable to us on the payment dates for the interest on the capital
notes, and the Government undertook to repay the deposit to us upon the
redemption of the capital notes (together with premium, if any, paid on them) or
upon the winding up of our bank, whichever is earlier. According to a letter
addressed to us from the General Comptroller of the Treasury, the payment of
interest on the deposit and the return of the principal amount of the deposit
will be effected together with linkage increments to the U.S. dollar.

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     According to the terms of the capital notes, our indebtedness under the
notes is subordinated in right of payment to all our secured indebtedness and
obligations and to all our future indebtedness and obligations, secured or
unsecured, which by their terms shall be senior in right of payment to the
notes, and rank equally to all our other unsecured indebtedness and obligations.
We have pledged (by a floating charge) a substantial portion of our assets in
favor of the Bank of Israel, as collateral for the repayment of the special line
of credit. We have also pledged in favor of some other Israeli banks certain
deposits we have deposited with them, in order to secure our obligations to
them. We are not aware of any unsecured indebtedness or obligations which by
their terms are senior in right of payment to the capital notes. However, under
Israeli law, certain types of indebtednesses of a company are deemed to have
priority, in the event of winding up or receivership proceedings ,over regular
unsecured debts, such as indebtedness to employees, indebtedness to the income
tax authorities, and rental obligations. The amount of the secured debt ranking
prior to the right of payment to the notes, as of December 31, 2006, was NIS 761
million.

     Even though the Government has undertaken to pay us interest back-to-back
with the payment of interest on the capital notes and to pay us the outstanding
principal amount of the capital notes upon their redemption or upon our winding
up, the Government's obligation inures to our favor and not to the favor of the
holders of the capital notes and, therefore, in the event of our insolvency, the
Government's obligation does not guarantee that the payment due to the holders
of the capital notes will be made.

     THE TRADING ON THE TEL AVIV STOCK EXCHANGE IN OUR PREFERRED ORDINARY SHARES
AND CERTAIN CLASSES OF OUR PREFERRED SHARES MAY BE RESTRICTED AND THESE SHARES
MAY EVENTUALLY BE DELISTED.

     Our Preferred Ordinary Shares, our C Shares, CC Shares, CC1 Shares and our
capital notes are traded on the Tel Aviv Stock Exchange ("TASE"). Pursuant to
the rules and procedures adopted by the TASE, securities of a company which are
traded on the exchange must abide by certain preservation requirements
concerning the minimum value of the public's holdings in such class of
securities, the minimum rate of the public's holdings of such class of
securities and the minimum capital of the company. Securities are reviewed every
six months to see if they comply with the preservation requirements. If a class
of securities fails to comply with the preservation requirements on two
consecutive reviews, it is moved to a special list (the "preservation list")
and, thereafter, is traded on a limited basis. If within 12 months of being
placed on the preservation list the securities do not fulfill the conditions to
enable their return to regular trading, then (subject to certain provisions
which allow an extension of the above 12 month time frame), the class of
securities will be de-listed from trading.

     Following implementation of Accounting Standard No. 22, "Financial
Instruments: Disclosure and Presentation," as of January 1, 2006 C Shares, CC
Shares and CC1 Shares that are included in the shareholders' equity are
reclassified as liabilities in respect of profit-participating preference
shares. Following this reclassification, our shareholders' equity decreased as
of January 1, 2006 by an amount of NIS 204.1 million and as of January 1, 2007,
due to the above decrease, our shareholders' equity amounted to NIS 20 million.
According to the by-laws of the Tel Aviv Stock Exchange, if shareholder equity,
during four consecutive financial statements (including quarterly statements),
is less than NIS 2 million and the value of public's holdings in the company is
less than NIS 24 million, the company's shares will be moved to the preservation
list. It should be noted that as of June 30, 2007, the value of the public's
holdings in our shares is approximately NIS 125 million. For further information
on our shareholders' equity and Accounting Standard No. 22, see "Item 5.
Operating and Financial Review and Prospects-Liquidity and capital
resources-Equity Capital".

                                       17
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     On May 1, 2007, certain changes went into effect in the preservation rules
and directives of the TASE. As part of these changes, the minimum amount of the
value of public holdings in securities that are traded on the exchange was
increased from NIS 2.4 million to NIS 5 million. In the event that the value
falls below this amount, the shares of a company are removed from the regular
list and moved to the preservation list. The measurement of the value is based
on the average price of the shares during the second and fourth quarters of the
year. The value of the holdings of the public in the Bank's Preferred Ordinary
Shares which are one of the five types of securities of the Bank that are traded
at present on the stock exchange, amounted to NIS 5.2 million as of the date of
release of the financial statements. As part of the aforementioned changes, it
was also stipulated that a security will be returned from the preservation list
to the regular list within 12 months of the date on which it ceased trading on
the regular list, if the value of the public's holdings therein amounts to at
least NIS 7 million (as opposed to the present threshold of NIS 3.5 million). It
was further stipulated that, apart from the aforementioned threshold, the return
to the regular list within the following 12 months is contingent upon additional
conditions and that a security that does not return to the regular list within
24 months, it will be delisted.

     While we believe that we are currently in compliance with the preservation
requirements, there can be no assurance that, as a result of a decrease in the
value of the public's holdings or otherwise, we will continue to be in
compliance with those requirements. If our shares or our capital notes traded on
the TASE were to be moved to the preservation list or delisted, their liquidity
would be adversely affected.

     On August 12, 2007, the TASE will launch a new list for lightly-traded
shares. Trading in such shares will take place only twice a day, at the start
and end of the trading session. Trading will be carried out by a call-auction
and there will not be continuous trading in these shares. A share will be
included in this list if the median daily trading volume during the six month
period prior to the "determining date" is below NIS 2,000 and if the average
turnover in the share is below NIS 20,000. The "determining date" to be included
in the list is June 15, 2007. The list will be updated twice a year, on June 15
and December 15 of each year. On June 24, 2007, the TASE advised us that
according to trading-volume data for the six month period ending on June 15,
2007, our Preferred Ordinary Shares and our C Shares, CC Shares and and CC1
Shares are marked for inclusion in the new list.

                                       18
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     YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES IN THE UNITED STATES
AGAINST OUR OFFICERS AND DIRECTORS.

     All of our directors and executive officers are non-residents of the United
States. A significant portion of our assets and the personal assets of our
directors and executive officers are located outside the United States.
Therefore, it may be difficult to effect service of process upon any of these
persons within the United States. In addition, a judgment obtained in the United
States against us, and most of our directors and executive officers, including
but not limited to judgments based on the civil liability provisions of the U.S.
federal securities laws, may not be collectible in the United States.

     Generally, it may also be difficult to bring an original action in an
Israeli court to enforce liabilities based upon the U.S. federal securities laws
against us and most of our directors and executive officers. Subject to
particular time limitations, executory judgments of a United States court for
liquidated damages in civil matters may be enforced by an Israeli court,
provided that:

     (1)  the judgment was obtained after due process before a court of
          competent jurisdiction, that recognizes and enforces similar judgments
          of Israeli courts, and according to the rules of private international
          law currently prevailing in Israel;

     (2)  adequate service of process was effected and the defendant had a
          reasonable opportunity to be heard;

     (3)  the judgment and its enforcement are not contrary to the law, public
          policy, security or sovereignty of the State of Israel;

     (4)  the judgment was not obtained by fraud and does not conflict with any
          other valid judgment in the same matter between the same parties;

     (5)  the judgment is no longer appealable; and

     (6)  an action between the same parties in the same matter is not pending
          in any Israeli court at the time the lawsuit is instituted in the
          foreign court.

     POLITICAL AND ECONOMIC CONDITIONS IN ISRAEL MAY LIMIT OUR ABILITY TO
CONTINUE OUR OPERATIONS DURING THE RUN-OFF PERIOD. THIS COULD RESULT IN A
MATERIAL ADVERSE EFFECT ON OUR REMAINING OPERATIONS AND BUSINESS.

     We are incorporated under the laws of the State of Israel, where we also
maintain our offices. Political, economic and security conditions in Israel
directly influence us. Since the establishment of the State of Israel in 1948,
Israel and its Arab neighbors have engaged in a number of armed conflicts. A
state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. Major hostilities between Israel and its neighbors
may hinder Israel's international trade and lead to economic downturn. This, in
turn, could have a material adverse effect on our remaining operations and
business.

     Our offices are located in Israel. Our operations could be materially and
adversely affected by acts of terrorism or if major hostilities should occur in
the Middle East or trade between Israel and its present trading partners should
be curtailed, including as a result of acts of terrorism in the United States.
Any such events may not be covered by insurance.

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     TERRORIST ATTACKS IN ISRAEL AND GLOBALLY MAY HAVE A MATERIAL ADVERSE EFFECT
ON OUR OPERATING RESULTS.

     Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, terrorist attacks in Israel and other
acts of violence or war may affect the markets on which our securities trade,
the markets in which we operate, and our remaining operations during the run-off
period. We cannot assure you that there will not be further terrorist attacks
against the United States or Israel, or against American or Israeli businesses.
These attacks or subsequent armed conflicts resulting from or connected to them
may directly impact our remaining business during the run-off period or the
operations of our customers. Furthermore, the ongoing armed conflicts around the
world such as in Iraq could have a further impact on our remaining operations.

     WE ARE INVOLVED IN LITIGATION ALLEGING VIOLATIONS OF THE SECURITIES LAWS OF
THE STATE OF ISRAEL THAT MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.

     In October 2002, a class action was filed against us and certain of our
present and former officers and directors asserting claims under the Securities
Law - 1968 (Israel) and the related Securities Regulations (Immediate and
Periodic Reports) - 1970 (Israel). The class action alleges that we breached our
duty to report significant events in accordance with the Securities Law - 1968
(Israel) and the related Securities Regulations (Immediate and Periodic Reports)
- 1970 (Israel). Under Israeli law, the class action has to be approved by the
court. The court has not yet approved this class action. In 2005, we and the
plaintiff entered a mediation process, which was not successful. On May 17,
2005, the court decided to grant the motion of the above plaintiff for discovery
of documents and ordered us to produce most of the requested documents,
including minutes of the meetings of our Board of Directors and our credit
committee, audit reports of the Supervisor of Banks, and specific
correspondence. We appealed this decision and on March 9, 2006 our appeal was
denied by the District Court. On April 3, 2006, we filed a motion to the Supreme
Court to grant leave to appeal the denial of our appeal of the discovery order.
On January 22, 2007, the Supreme Court decided, with the consent of the parties,
that part of the documents in respect of which the Bank filed its appeal would
not be disclosed, whereas the others would be disclosed. The Bank transferred to
the plaintiff those documents which, by its understanding, it had to disclose.
On July 11, 2007, a settlement agreement was signed between the parties, which
is subject to the approval of our shareholders at their general meeting
(scheduled to be held on August 20, 2007) and the approval of the Court.

     In March 2003, a derivative action was filed against us and certain of our
present and former officers and directors. The derivative action alleges that
the officers and directors breached their duty of care to us and were negligent
in carrying out their duties. Under Israeli law, the derivative action has to be
approved by the court. The parties' witnesses were cross-examined on May 26,
2005 and the last written summations were filed during the last quarter of 2005.
On June 18, 2006, the Court rendered its decision rejecting the motion to
certify the derivative action and awarded the respondents legal fees in the
amount of NIS 40,000. The plaintiff has appealed the above decision and we must
wait until the end of the statutory time period to see if in fact this action is
conclusively terminated. On September 18, 2006, the plaintiff appealed the
decision to reject the motion to approve the suit as a derivative suit to the
Supreme Court. The court set dates for the filing of written summaries by the
parties to the suit and set the date for completion of oral claims at November
26, 2007.

                                       20
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     On June 1, 2005, we received notices from counsels to our insurers that our
insurers have reservations as to the validity of the insurance coverage for the
two actions mentioned above and that they reserve their rights in this matter.
The bank has given notice to the insurers that it categorically rejects these
reservations and intends to enforce its rights against the insurers. On July 11,
2007, we reached an agreement with our insurers whereby they will participate in
a portion of the costs of the settlement agreement signed in connection with the
class action, as mentioned above.

     It is difficult to predict the outcome of these legal proceedings. The
litigation process is inherently uncertain. If we are not successful in
defending against the class action, we could incur a substantial monetary
judgment (the amount of which, in whole or in part, may not be covered by our
insurance coverage) and suffer damage to our reputation. Whatever the outcome of
these proceedings is, we could incur substantial costs and we will expend a
significant amount of time and attention. Since the derivative action is an
action in the name and on behalf of the company, it is the opinion of our legal
advisors that our main exposure in these proceedings is for expenses including
court costs, attorneys fees and special remuneration to the plaintiff.

     POTENTIAL CLAIMS RELATING TO OUR BANKING OPERATIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.

     We may be subject to claims relating to our banking operations. Our
agreements with our business customers generally contain provisions designed to
limit our exposure to potential claims, but these provisions may be declared
void or modified by the court, if the court determines that they are prejudicial
in accordance with the Standard Contracts Law -1982 (Israel). We also maintain
an insurance policy. However, our insurance may not cover all relevant claims or
may not provide sufficient coverage. Our remaining business, financial condition
and operating results could be materially adversely affected if costs resulting
from future claims are not covered by our insurance or exceed our coverage.

     YOUR RIGHTS AND RESPONSIBILITIES AS A SHAREHOLDER WILL BE GOVERNED BY
ISRAELI LAW AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF
SHAREHOLDERS UNDER U.S. LAW.

     We are incorporated under Israeli law. The rights and responsibilities of
holders of our shares are governed by our Memorandum of Association, our
Articles of Association and by Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of an Israeli company
has a duty to act in good faith toward the company and other shareholders and to
refrain from abusing his power in the company, including, among other things, in
voting at the general meeting of shareholders on certain matters.

                                       21
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ITEM 4. INFORMATION ON THE COMPANY

     THE FINANCIAL INFORMATION PRESENTED IN THIS ITEM BELOW IS BASED ON ISRAELI
GAAP, WHICH MAY DIFFER MATERIALLY FROM U.S. GAAP. FOR A RECONCILIATION OF OUR
FINANCIAL INFORMATION TO U.S. GAAP, SEE "ITEM 3.A. SELECTED FINANCIAL DATA" AND
"ITEM 17. FINANCIAL STATEMENTS."

A.   HISTORY AND DEVELOPMENT OF THE COMPANY

     The Industrial Development Bank of Israel Limited was incorporated under
the laws of the State of Israel on October 7, 1957. Our initial purpose was to
encourage and assist in the establishment and expansion of industrial
enterprises in Israel. The Bank of Israel issued a banking license in 1989
permitting us to operate as a commercial bank in Israel pursuant to the Banking
Licensing Law -1981 (Israel) and, in September 1991, we commenced our commercial
banking operations.

     Our legal and commercial name is Industrial Development Bank of Israel Ltd.
Our registered office is located at 82 Menachem Begin Road, Tel-Aviv, Israel
67138, and our telephone number is 972-3-6272727. Our corporate website can be
accessed through www.idbi.co.il. The information found on our corporate website
is, however, not part of this Annual Report on Form 20-F. Our agent in the
United States regarding our C Shares, CC Shares, D Shares and DD Shares is
Mellon Financial Services Inc., located at 480 Washington Boulevard, Jersey
City, New Jersey 07310. Our agent in the United States regarding our capital
notes is JPMorgan Chase Bank, located at 4 New York Plaza, 15th floor, New York,
N.Y. 10004.

     We are owned primarily by the Government of Israel, Bank Leumi le-Israel
B.M., Israel Discount Bank Ltd. and Bank Hapoalim B.M. The Government of Israel
holds approximately 80% of our equity and approximately 45.78% of our
outstanding voting rights. The Government of Israel and the three largest banks
in Israel, Bank Hapoalim B.M., Bank Leumi le-Israel B.M. and Israel Discount
Bank Ltd., collectively hold approximately 85% of our voting rights.

     We are subject to the supervision and the regulations of the Bank of
Israel, through the Supervisor of Banks. Among other things, we are required to
submit periodic and other reports to the Bank of Israel and are subject to
inspections by the Bank of Israel. Since the State of Israel holds 45.8% of our
voting rights and about 50% of the rights to appoint directors, we are deemed to
be a "mixed company" under the Government Companies Law - 1975 (Israel) (the
"Government Companies Law"), and therefore we must also report to the Government
Companies Authority. Because the State of Israel is entitled to appoint
directors to our board, we are also deemed a "body that the Government of Israel
participates in its management" within the State Comptroller Law - 1958 (Israel)
and consequently we are subject to the State Comptroller's audit.

                                       22
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B.   BUSINESS OVERVIEW

     Until the liquidity crisis we experienced in the third quarter of 2002 (as
discussed below), our business focused on normal banking activities, including,
without limitation, the extension of short, medium and long term credit in NIS
and foreign currencies, the acceptance of deposits in all currencies, the
maintenance of checking accounts and the issuance of credit cards. In addition,
we issued guarantees of all types in Israel and abroad and issued letters of
credit and other documents relating to foreign trade. We maintained a foreign
exchange dealing room, which provided currency conversion services and services
relating to the hedging of currency and interest rate risk. Our finance
department also provided services in factoring and futures transactions. We also
analyzed and prepared applications for "Approved Enterprise" status and
administered government grants. Our customers included many of Israel's well
known large industrial companies, medium size commercial entities, public
institutions, kibbutzim and other agricultural sector companies. Until 2002, our
goal was to gradually expand our range of commercial banking activities, which
generally focused on the business and industrial sectors, and diversify our
customer base.

     The balance of the public's deposits with us sharply declined in the third
quarter of 2002. The balance of the public's deposits with us was NIS 3,597
million as of June 30, 2002 and, by December 31, 2002, the balance had declined
to NIS 1,291 million, a NIS 2,306 million decrease over 6 months. As a result of
the increased withdrawals of deposits by the public, we experienced a severe
liquidity crisis. The decline in the public's deposits continued since then and,
as of December 31, 2006, the balance of the public's deposits with us was NIS 67
million and as of March 31, 2007 it was NIS 66 million.

     In response to our liquidity problems, the Government of Israel and the
Bank of Israel proposed a plan for the sale of our assets and liabilities to a
third party. To help us manage our liquidity crisis and continue operations
until the sale, the Bank of Israel agreed to provide us a special line of
credit. See "Proposed Sale of the Bank and Extension of Special Line of Credit
by the Bank of Israel" below for a detailed description of the proposed sale and
the special line of credit from the Bank of Israel.

     We were unable to consummate the sale of our asset and liability portfolio
"en bloc" and within a short time frame and, on February 27, 2003, our Board of
Directors adopted and the Government of Israel approved the Run-Off Plan (as
defined below; see "Adoption of the Run-Off Plan and Amendment of the Special
Line of Credit") for our business, which has since been extended until July 31,
2008. We are currently operating under the terms of the Run-Off Plan. The
ultimate goal of the Run-Off Plan is the controlled disposal of our credit
assets over a period which will expire on July 31, 2008. For a more detailed
description of the Run-Off Plan and the amendments to the special line of
credit, see "Adoption of the Run-Off Plan and Amendment of the Special Line of
Credit" below.

PROPOSED SALE OF THE BANK AND EXTENSION OF SPECIAL LINE OF CREDIT BY THE BANK OF
ISRAEL

     On August 26, 2002, in response to our severe liquidity crisis, the Prime
Minister's Office of the State of Israel, the Finance Ministry of the State of
Israel and the Bank of Israel adopted a plan for the sale of our asset and
liability portfolio and the extension of a special line of credit by the Bank of
Israel to permit us to bridge our liquidity problems. Our Board of Directors
approved the sale of our asset and liability portfolio and the special line of
credit from the Bank of Israel in accordance with the plan and agreed to
cooperate during the sale process so as to facilitate its implementation.

                                       23
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     On September 9, 2002, the Governor of the Bank of Israel notified us that
he had decided to extend to us a special line of credit. According to the terms
of the special line of credit as initially granted, the interest rate on the
special line of credit (which was to be charged quarterly) was set by the
Governor of the Bank of Israel at a rate equal to the Bank of Israel Rate plus
3%. In addition, we were required to pay the Bank of Israel a commission at an
annual rate of 1% (which was to be charged monthly) in respect of the unutilized
amount of the special line of credit. The special line of credit was available
through the earlier of May 10, 2003 or the date of the sale of our asset and
liability portfolio.

     The grant of the special line of credit was also subject to various
conditions, including, without limitation, the pledge of a substantial part of
our assets to the Bank of Israel. The pledge in favor of the Bank of Israel was
created by us only on November 14, 2002 and the special line of credit, with an
available amount of credit of NIS 2.2 billion, was granted on that date. The
Governor of the Bank of Israel notified us on November 14, 2002 that our
drawings from the Bank of Israel prior to November 14, 2002 would bear interest,
until November 14, 2002, at a rate equal to the Bank of Israel Rate plus 5%,
while according to the terms of the special line of credit as determined on
September 9, 2002, from November 14, 2002, the special line of credit would bear
interest equal to the Bank of Israel Rate plus 3%.

     The pledge in favor of the Bank of Israel does not apply to all of our
assets. The assets that were not pledged to the Bank of Israel included the
following: (a) loans and credits guaranteed by the State of Israel with a total
balance sheet value of approximately NIS 5.7 billion as of December 31, 2006;
(b) our perpetual deposit with the Ministry of Finance in respect of the DD
Shares; and (c) deposits with other banking institutions in Israel and/or
abroad, and/or with brokers in Israel and/or abroad, that we make from time to
time in order to secure those of our liabilities to such banking institutions
and/or brokers that were created after November 14, 2002.

     On November 13, 2002, our Board of Directors approved a process intended to
result in the sale of our asset and liability portfolio. Our Board of Directors
approved the sale as an "en bloc" sale to one or more purchasers. However, our
Board of Directors soon realized that there was little interest on the part of
potential buyers in the proposed sale of our asset and liability portfolio, and
the information room which was opened in connection with the proposed sale was
closed at the end of January 2003 without any potential buyer having commenced a
due diligence review.

ADOPTION OF THE RUN-OFF PLAN AND AMENDMENT OF THE SPECIAL LINE OF CREDIT

     When it became apparent that the proposed "en bloc" sale of our assets and
liabilities within a short time frame would not be consummated, our Board of
Directors decided to entertain other alternatives to such a sale. At its meeting
on February 27, 2003, our Board adopted the principles of a proposed run-off
plan,the components of which included, among other things, (a) a supervised and
gradual realization of our credit assets, to be conducted over a period ending
on December 31, 2006, (b) a significant reduction in manpower and in operating
expenses, and (c) the continuation of the special line of credit by the Bank of
Israel during the period of the run-off. At the same meeting, our board approved
a detailed efficiency plan formulated by our management. The efficiency plan
included extensive cutbacks in operating expenses and manpower, including
termination and reduction of banking services unrelated to the collection of
existing loans.

                                       24
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     On July 29, 2003 the Ministerial Committee for Social and Economic Affairs
of the Government of Israel approved the run-off plan with certain modifications
(the "Run-Off Plan"), including fixing the implementation period of the plan at
three years, from July 29, 2003. In connection with the above governmental
approval of the Run-Off Plan, the Bank of Israel agreed on September 1, 2003 to
amend the terms of the special line of credit by extending it for a period of 36
months until August 1, 2006. Under the amended terms, the interest rate on the
utilized portion of the special line of credit was set at the interest rate of
the Bank of Israel, subject to "the fulfillment of all the conditions, including
that which is stipulated in the government's resolution regarding the date of
completion and return of the deposits to the public and the realization of the
bank's assets."

     On July 26, 2005 the Bank's Board of Directors discussed a document that
had been prepared regarding the extension of the Run-Off plan. In light of the
document's conclusion regarding the advantages of extending the Plan, the Board
of Directors approved the extension of the Plan until July 31, 2008, and its
continued implementation on the basis of the Plan that was presented before it.
Furthermore, the Bank's Board of Directors decided that due to the reduction in
the Bank's activity pursuant to the Run-Off Plan and the extended term of the
Plan, the Bank would notify the Governor of the Bank of Israel that it agrees
that its banking license be restricted in a manner that reflects its reduced
activity as derived from the Run-Off Plan, including the non-acceptance of new
deposits and the non-renewal of existing deposits that have reached maturity,
and to the restricted license specifying that it is valid until the end of the
Plan (July 31, 2008).

     On October 10, 2005 the Ministerial Committee for Social and Economic
Affairs (the Social Economic Cabinet) approved the extension of the Bank's
Run-Off Plan. The main principles of the Committee's decision are as follows:

     o    The assets of the Bank are to be realized in a supervised process and
          over a period ending by July 31, 2008, in the framework of the Run-Off
          Plan approved by the Bank's Board of Directors and with the changes to
          be determined by the Accountant General and the Government Companies
          Authority.

     o    The maximum amount of the special line of credit will at no time
          exceed NIS 1.25 billion and over the period of executing the Run-Off
          Plan it will not exceed the amounts approved by the Bank of Israel.

     o    The Bank will not use the special line of credit or other sources for
          the purpose of providing new credit.

     o    The Government is responsible for the repayment of the special line of
          credit as from July 1, 2005, on the condition that the interest on the
          credit line until the end of the plan shall not exceed the Bank of
          Israel Rate.

                                       25
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     o    If at the end of the Run-Off Plan there remains an unpaid balance of
          the special line of credit, the Government will repay the balance to
          Bank of Israel by July 31, 2008. In exchange for its repayment of the
          credit balance, the collateral that was provided by the Bank for
          repayment of the credit line will be assigned to the Government.

     We are presently operating under the terms of the Run-Off Plan.

     Following the approval by the government of Israel of the extension of the
Run-Off Plan, the Governor of the Bank of Israel notified us, in his letter of
October 30, 2005, of his decision to extend the special line of credit granted
to us by the Bank of Israel until July 31, 2008, and of the new terms that will
apply to the credit line. The terms of the special line of credit impose
significant restrictive operating covenants on us. The main terms of the special
line of credit, as they presently apply, and the main restrictions thereunder
are as follows:

     o    The credit line will be in effect until no later than July 31, 2008.

     o    The maximum amount of the credit line will at no time exceed NIS 1.25
          billion and it will decline gradually in accordance with the forecast
          that was attached to the notice of the Governor of the Bank of Israel
          regarding the extension of the line until July 31, 2008.

     o    The Bank will be allowed to continue to use the credit line in order
          to meet the liquidity needs it has for fulfilling its current and
          banking obligations.

     o    The interest on the utilized credit will be the Bank of Israel Rate.

     o    Any significant administrative expense that deviates from the Bank's
          ordinary course of business and has an effect on its business results
          will require the approval of the Bank of Israel.

     o    Limitations were set on the Bank's volume of activity with respect to
          making and pledging deposits with banks.

     In the letter of the Governor of the Bank of Israel dated October 30, 2005
it was noted that if the Bank of Israel should see fit, and to the extent
required at its sole discretion, additional restrictions regarding the Bank's
operations in addition to those specified in the aforementioned letter will be
considered, whether or not as a result of non-conformity with the objectives of
the Run-Off Plan.

     The outstanding balance of the special line of credit from the Bank of
Israel, not including interest accrued but not yet charged, was NIS 1.389
billion as of December 31, 2004, NIS 1.028 billion as of December 31, 2005, NIS
751 million as of December 31, 2006 and NIS 600 million as of May 31, 2007.

                                       26
```

```

     In his letter dated January 29, 2006 we were notified by the Governor of
the Bank of Israel as follows:

     o    The banking license that we received on June 4, 1989 would be
          restricted so that we could not engage in any business we did not
          engage in prior to the date of the license (until the date of the
          license we engaged in the financing of investments) and without
          derogating from the generality of the aforementioned, we would not
          receive new deposits and would not renew deposits reaching their
          current date of maturity, other than from shareholders.

     o    Our banking license would be revoked as of August 1, 2008.

OUR REQUEST FOR REIMBURSEMENT OF SURPLUS INTEREST ON THE SPECIAL LINE OF CREDIT

     We have petitioned the Bank of Israel to reimburse us for certain interest
payments that we previously made. Prior to the amendment of the special line of
credit on September 1, 2003 (in connection with the adoption and approval of the
Run-Off Plan), the interest rate on the amounts outstanding on the credit we
drew from the Bank of Israel was (a) the Bank of Israel Rate plus 5% from August
2002 to November 13, 2002 and (b) the Bank of Israel Rate plus 3% from November
13, 2002 to July 29, 2003. Additionally, we paid a high interest rate on
liquidity deficits that occurred from time to time in our account with the Bank
of Israel. As amended, the special line of credit has an interest rate on
outstanding amounts equal to the Bank of Israel Rate. We have requested that the
Bank of Israel reimburse us for the difference between the amount of interest
that we paid at the previous interest rates between August 2002 and July 2003
and the amount of interest that we would have paid at the new interest rate
(Bank of Israel Rate) during the same time period. The total amount that we have
requested to be reimbursed, with interest thereon, as of December 31, 2006 is
NIS 77 million. In recent discussions between us and the Bank of Israel it was
clarified that the matter of the reimbursement as aforesaid, shall be reviewed
upon the full payment of the special line of credit.

CURRENT OPERATIONS UNDER THE RUN-OFF PLAN

     As a result of our considerable efforts to collect existing loans, we have
significantly reduced the aggregate amount of our outstanding loans to the
public. This balance (not including a loan to the Israel Electric Corporation
Ltd. guaranteed by the State of Israel and granted out of a deposit that the
State of Israel has deposited with us for that purpose), which at December 31,
2001 amounted to NIS 5,238 million, was reduced to NIS 2,784 million on December
31, 2003, to NIS 1,826 million on December 31, 2004, to NIS 1,276 million on
December 31, 2005 and to NIS 848 million on December 31, 2006. Even when we take
into consideration the allowances for doubtful debts provided for during this
period (and which are deducted from the amount of our outstanding loans), this
still represents a collection of considerable loan amounts.

     As part of the implementation of the Run-Off Plan, we have discontinued or
almost discontinued the following activities: our foreign currency and foreign
trade activity, operation of a foreign exchange dealing room, operation of
current accounts and securities accounts, execution of Government grants through
the "Approved Enterprise" status system, operation of independent teller and
clearing facilities and issuance of credit cards. We refrain from accepting new
deposits, and pursuant to directives of the Bank of Israel, we ceased renewing
deposits that reach maturity, with certain exceptions.

                                       27
```

```

     Following the liquidity crisis that we experienced in the third quarter of
2002 and the implementation of our Run-Off Plan, we are presently able to borrow
only by drawing on the special line of credit extended to us by the Bank of
Israel. The special line of credit is available to us only in shekels at a
variable rate of interest equal to the Bank of Israel Rate and for a period
expiring on July 31, 2008. We are, therefore, unable to maintain a balance in
currency and linkage bases, in maturities and in interest rates, with respect to
our assets and liabilities.

     In order to reduce our exposure to the risks resulting from these
circumstances, we are carrying out swap transactions with other banks.

     For further discussion of our risk management, see "Item 11. Quantitative
and Qualitative Disclosures About Market Risk" below.

     The reduction in our operations was accompanied by a reduction in our
staff. The number of employees, which as of January 1, 2002 was 170, was reduced
to 79 by December 31, 2003, and was further reduced to 50 by December 31, 2006.

     In addition to the significant reduction in payroll expenses because of the
reduction in the number of employees and the salary reductions that were
implemented at the beginning of 2003, we also took steps to significantly reduce
operating costs. We relocated to new offices in September 2003. The new office
space is two-thirds smaller than the previous office space that we rented and
the rent per square meter of the new office space is significantly lower than
the rent we had been paying. We have also outsourced our computer services in
order to reduce our computer expenses. We maintain close and continuous contacts
with the Bank of Israel and the Government of Israel. In accordance with the
run-off plan, the efficiency plan and the limitation imposed on our banking
license, we will refrain from extending new loans to customers and our
activities will concentrate on collection of the existing loan portfolio. Our
policy is to act diligently in all matters relating to collection of problematic
debts, and in connection with such policy, we have incurred significant
collection costs and legal fees.

     Since the Governor of the Bank of Israel has announced that our bank
license will expire on August 1, 2008, we will cease on that date to operate as
a banking entity. We expect that the Government of Israel will ultimately decide
what our status will be upon expiration of the run-off period. We do not know
when the Government of Israel will make a definitive decision with respect to
our status after the expiration of the run-off period. We note, however, that
our status at the expiration of the run-off period is uncertain and that we may
cease operations at that time. The financial statements do not contain any
changes in the value and classification of assets and liabilities that may be
needed when we cease to operate as a banking entity.

     The Ministry of Finance and the Government Companies Authority are
examining a possible plan for the sale and/or transfer of all of our issued and
paid share capital to a third party, by: (a) sale and/or transfer of all of the
shares held by the State and the three large banking groups to a designated
purchaser; (b) the purchase by the designated purchaser of our shares held by
the public and traded on the Tel Aviv Stock Exchange, within the framework of an
arrangement plan pursuant to Section 350 of the Companies Law that would require
the approval of the court and the affirmative vote of a special majority of our
public shareholders; and (c) the redemption of the publicly held D Shares and DD
Shares, including the payment of the preferred dividends in arrears in respect
of these shares (as required by their terms in the event of redemption).

                                       28
```

```

     As part of the examination of the Plan, the Government Companies Authority
published a request for information ("RFI") where parties interested in
purchasing our shares pursuant to the proposed Plan were invited to give notice
of their interest in the purchase. On July 4, 2007, the Government Companies
Authority advised us that it has received eleven applications from companies and
individuals in response to the RFI and that these applications will be reviewed
in the near future.

     It should be clarified, at this stage it is not known if the outline
currently under consideration will in fact be adopted and implemented. This
question will be influenced, among other things, from the response and reaction
to the RFI and the willingness of the three banking groups to transfer their
holdings. In addition, the sale of the State's holdings in the Bank will require
a privatization resolution by the Ministerial Privatization Committee.

     In a letter dated May 1, 2007, the Bank of Israel notified us that if the
proposed Plan for the sale and/or transfer of our shares is implemented prior to
August 1, 2008, our banking license will be revoked on the date of the
implementation of the Plan.

AVERAGE BALANCE SHEETS AND INTEREST RATES

     The following tables show our average balance sheets and interest rates for
the three years ending on December 31, 2006, 2005 and 2004.

                                       29
```

```

AVERAGE BALANCE SHEETS AND INTEREST RATES
REPORTED AMOUNTS

                                                               2006                                     2005                                      2004
                                                ---------------------------------       -----------------------------------       -----------------------------------
                                                            FINANCING     RATE OF                     FINANCING     RATE OF                     FINANCING     RATE OF
                                                AVERAGE      INCOME       INCOME        AVERAGE        INCOME       INCOME        AVERAGE        INCOME       INCOME
                                              BALANCE (2)   (EXPENSES)   (EXPENSES)   BALANCE (2)    (EXPENSES)    (EXPENSES)   BALANCE (2)     (EXPENSES)   (EXPENSES)
                                                -------      -------      -------       -------        -------      -------       -------        -------      -------
                                                    NIS MILLIONS             %               NIS MILLIONS              %               NIS MILLIONS              %
                                                --------------------      -------       ----------------------      -------       ----------------------      -------

ISRAELI CURRENCY - NON-LINKED
ASSETS
Credit to the Public                              337.5         23.3         6.90         587.3           33.1         5.64         914.2           63.2         6.91
Deposits with Bank of Israel                        5.4            -            -           8.5              -            -          10.8            0.1         0.93
Deposits with banks                                21.0          1.1         5.25          22.5            0.9         4.00          16.1            0.8         4.97
Debentures                                            -            -            -           0.6            0.1        16.67           1.3            0.1         7.69
                                                -------      -------      -------       -------        -------      -------       -------        -------      -------
Total assets before effect of derivatives         363.9         24.4         6.71         618.9           34.1         5.51         942.4           64.2         6.81
Effect of derivatives ALM (3)                     137.7          7.7         5.59         288.4           11.6         4.02         524.3           34.4         6.56
                                                -------      -------                    -------        -------                    -------        -------
Total assets after effect of derivatives          501.6         32.1         6.40         907.3           45.7         5.04       1,466.7           98.6         6.72
                                                =======      =======      =======       =======        =======      =======       =======        =======      =======

LIABILITIES
Deposits of the public                             46.0         (1.7)       (3.70)        163.7           (5.5)       (3.36)        231.0          (10.8)       (4.67)
Deposits of Bank of Israel                        889.9        (45.2)       (5.08)      1,172.0          (43.0)       (3.67)      1,715.6          (72.6)       (4.23)
                                                -------      -------      -------       -------        -------      -------       -------        -------      -------
Total liabilities                                 935.9        (46.9)       (5.01)      1,335.7          (48.5)       (3.63)      1,946.6          (83.4)       (4.28)
                                                =======      =======      =======       =======        =======      =======       =======        =======      =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                    1.70                                      1.88                                      2.53
INTEREST MARGIN INCLUDING DERIVATIVES                                        1.39                                      1.41                                      2.44
                                                -------      -------      -------       -------        -------      -------       -------        -------      -------
ISRAELI CURRENCY -LINKED TO THE CPI
ASSETS
Credit to the Public                              539.3         27.9         5.17         663.4           54.2         8.17         923.0           60.9         6.59
Credit to governments                               7.6            -            -          10.0            0.3         3.00          17.9            0.1         0.55
Deposits with banks                                13.7          0.8         5.84          19.6            1.5         7.65          25.7            1.6         6.22
Debentures                                          0.8            -            -           2.6            0.2         7.69           7.9            0.5         6.33
                                                -------      -------      -------       -------        -------      -------       -------        -------      -------
Total assets                                      561.4         28.7         5.11         695.6           56.2         8.08         974.5           63.1         6.48
                                                =======      =======      =======       =======        =======      =======       =======        =======      =======

LIABILITIES
Deposits of the public                             51.6         (2.6)       (5.04)        116.5           (8.3)       (7.12)        221.2          (12.5)       (5.65)
Deposits of the Government                        335.9         (7.2)       (2.14)        362.7          (18.0)       (4.96)        394.2          (12.9)       (3.27)
Deposits of banks                                     -            -            -             -              -            -           2.1           (0.1)       (4.76)
                                                -------      -------      -------       -------        -------      -------       -------        -------      -------
                                                  387.5         (9.8)       (2.53)        479.2          (26.3)       (5.49)        617.5          (25.5)       (4.13)
Effect of derivatives ALM (3)                      43.3         (1.1)       (2.54)         92.3           (4.2)       (4.57)        194.4           (8.9)       (4.58)
                                                -------      -------                    -------        -------                    -------        -------
Total liabilities                                 430.8        (10.9)       (2.53)        571.5          (30.5)       (5.34)        811.9          (34.4)       (4.24)
                                                =======      =======      =======       =======        =======      =======       =======        =======      =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                    2.58                                      2.59                                      2.35
INTEREST MARGIN INCLUDING DERIVATIVES                                        2.58                                      2.74                                      2.24

                                       30
```

```

AVERAGE BALANCE SHEETS AND INTEREST RATES (CONT'D)
REPORTED AMOUNTS
                                                                      2006                                        2005                                          2004
                                                      -----------------------------------         --------------------------------------         ------------------------------------
                                                                    FINANCING     RATE OF                       FINANCING       RATE OF                        FINANCING     RATE OF
                                                      AVERAGE        INCOME       INCOME         AVERAGE         INCOME         INCOME           AVERAGE        INCOME       INCOME
                                                    BALANCE (2)    (EXPENSES)    (EXPENSES)     BALANCE (2)     (EXPENSES)     (EXPENSES)      BALANCE (2)     (EXPENSES)   (EXPENSES)
                                                      -------        -------      -------         -------        -------         -------         -------        -------       -------
                                                           NIS MILLIONS              %                 NIS MILLIONS                 %                 NIS MILLIONS               %
                                                      ----------------------      -------         ----------------------         -------         ----------------------       -------
FOREIGN CURRENCY-DOMESTIC OPERATIONS (4)
ASSETS
Credit to the Public                                  6,370.5          (90.9)       (1.43)        6,691.0          892.1           13.33         7,071.6          400.6          5.66
Credit to governments                                    16.9           (0.9)       (5.33)           29.5            0.7            2.37            44.8            1.0          2.33
Deposits with Bank of Israel                              0.6              -            -             1.0              -               -             1.0              -             -
Deposits with banks                                      18.5           (1.2)       (6.49)           53.5            5.8           10.84            43.3            0.5          1.15
Debentures                                                  -              -            -               -              -               -             0.1           (0.1)      (100.00)
                                                      -------        -------      -------         -------        -------         -------         -------        -------       -------
                                                      6,406.5          (93.0)       (1.45)        6,775.0          898.6           13.26         7,160.8          402.0          5.61
Effect of derivatives ALM (3)                               -              -            -            57.2            7.1           12.36           127.2           16.9         13.29
                                                      -------        -------                      -------        -------                         -------        -------
Total assets                                          6,406.5          (93.0)       (1.45)        6,832.2          905.7           13.26         7,288.0          418.9          5.75
                                                      =======        =======      =======         =======        =======         =======         =======        =======       =======
LIABILITIES
Deposits of the public                                    4.5           (0.1)       (2.22)           29.1           (1.7)          (5.84)           80.1           (0.7)         (0.9)
Deposits of the Government                            6,260.1           91.4         1.46         6,471.1         (883.6)         (13.65)        6,648.8         (372.1)        (5.60)
Deposits of banks                                        11.4            0.9         7.89            19.6            0.7            3.57            30.4           (2.6)        (8.55)
                                                      -------        -------      -------         -------        -------         -------         -------        -------       -------
                                                      6,276.0           92.2         1.47         6,519.8         (884.6)         (13.57)        6,759.3         (375.4)        (5.55)
Effect of derivatives ALM (3)                            94.4            5.0         5.35           253.3          (11.9)          (4.70)          457.1          (38.0)        (8.31)
                                                      -------        -------                      -------        -------                         -------        -------
Total liabilities                                     6,370.4           97.2         1.53         6,773.1         (896.5)         (13.24)        7,216.4         (413.4)        (5.73)
                                                      =======        =======      =======         =======        =======         =======         =======        =======       =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                            0.02                                          (0.31)                                        0.06
INTEREST MARGIN INCLUDING DERIVATIVES                                                0.08                                           0.02                                         0.02
TOTAL
Monetary assets generating financial income           7,331.8          (39.9)       (0.54)        8,089.5          988.9           12.22         9,077.7          529.3          5.83
Effect of derivatives ALM (3)                           137.7            7.7         5.59           345.6           18.7            5.41           651.5           51.3          7.87
                                                      -------        -------                      -------        -------                         -------        -------
Total monetary assets generating financing
income                                                7,469.5          (32.2)       (0.43)        8,435.1        1,007.6           11.95         9,729.2          580.6          5.97
                                                      =======        =======                      =======        =======                         =======        =======

Monetary liabilities generating financing
expenses                                              7,599.4           35.5        (0.47)        8,334.7         (959.4)         (11.51)        9,323.4         (484.3)        (5.19)
Effect of derivatives ALM (3)                           137.7            3.9         2.83           345.6          (16.1)          (4.66)          651.5          (46.9)        (7.20)
                                                      -------        -------                      -------        -------                         -------        -------
Total liabilities generating financing expenses       7,737.1           39.4         0.51         8,680.3         (975.5)         (11.24)        9,974.9         (531.2)        (5.33)
                                                      =======        =======                      =======        =======                         =======        =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                           (0.07)                                          0.71                                         0.64
INTEREST MARGIN INCLUDING DERIVATIVES                                                0.08                                           0.71                                         0.64

                                       31
```

```

AVERAGE BALANCE SHEETS AND INTEREST RATES (CONT'D)
REPORTED AMOUNTS

                                                               2006                                2005                              2004
                                                ---------------------------------   ---------------------------------   ---------------------------------
                                                             FINANCING   RATE OF                 FINANCING    RATE OF               FINANCING     RATE OF
                                                AVERAGE       INCOME     INCOME      AVERAGE      INCOME       INCOME    AVERAGE     INCOME       INCOME
                                               BALANCE (2)   (EXPENSES) (EXPENSES)  BALANCE (2)  (EXPENSES) (EXPENSES)  BALANCE (2) (EXPENSES)   (EXPENSES)
                                                -------       -------     -------   -------       -------     -------   -------       -------     -------
                                                    NIS MILLIONS             %          NIS MILLIONS             %          NIS MILLIONS              %
                                                ---------------------     -------   ---------------------     -------   ----------------------    -------

In respect of options                                               -                                (0.8)                                0.6
Financing commissions and other financing
income                                                           23.7                                41.5                                27.8
Other financing expenses                                        (12.7)                              (11.2)                              (11.6)
                                                              -------                             -------                             -------
Financing income before allowance for
doubtful debts                                                   18.2                                61.6                                66.2
Allowance for doubtful debts (including
general and supplementary provisions)                           (21.7)                              (44.2)                              (70.2)
                                                              -------                             -------                             -------
Earnings from financing operations after
allowance for doubtful debts                                     (3.5)                               17.4                                (4.0)
                                                              =======                             =======                             =======
Other monetary assets                             868.7                               852.6                               852.9
General and supplementary allowance for
doubtful debts                                    (55.1)                              (65.6)                              (76.8)
Non-monetary assets                                57.1                                63.5                                74.3
                                                -------                             -------                             -------

Total assets                                    8,202.5                             8,940.0                             9,928.1
                                                =======                             =======                             =======

Other monetary liabilities                         79.3                                87.6                                90.3
Non-monetary liabilities                            1.6                                 2.6                                 1.8
Capital resources                                 522.2                               515.1                               512.6
                                                -------                             -------                             -------

Total liabilities and capital resources         8,202.5                             8,940.0                             9,928.1
                                                =======                             =======                             =======

FOOTNOTES:

(1)  The data in this table is presented before and after the effect of
     derivative instruments (including the off-balance sheet effect of
     derivative instruments).

(2)  Based on monthly opening balances except for the non-linked Israeli
     currency segment where the average balance is based on daily figures, and
     net of the average balance of the specific allowance for doubtful debts.

(3)  Derivatives (ALM) which comprise part of the Bank's asset and liability
     management and with respect to which revenue (expense) can be attributed to
     the linkage segments.

(4)  Including Israeli currency linked to foreign currency.

                                       32
```

```

     The following table summarizes our assets and liabilities outstanding as of
December 31, 2006, 2005, and 2004:

                                 IN  MILLIONS OF NIS
                             ----------------------------
                                   REPORTED AMOUNTS
                             ----------------------------
                             2006        2005        2004
                             ----        ----        ----

Total assets                7,516       8,721       9,078

Assets consisting of
credits to the public       6,519       7,681       7,993

Total liabilities*          7,006       8,193       8,570

Liabilities
consisting of
deposits                    6,923       8,110       8,488

*    Not including Preference shares

     The following table shows the linkage basis (currency) breakdown of our
credit to the public outstanding as of December 31, 2006, 2005 and 2004:

                                                      IN MILLIONS OF NIS
                                                -----------------------------
                                                       REPORTED AMOUNTS
                                                -----------------------------
                                                 2006       2005        2004
                                                -----       -----       -----

Non-linked Israeli currency                       214         400         709

CPI linked Israeli currency                       465         617         717

Dollar and linked thereto                       5,819       6,597       6,450

Other foreign currency and linked thereto          21          67         117
                                                -----       -----       -----
TOTAL                                           6,519       7,681       7,993
                                                =====       =====       =====

                                       33
```

```

INVESTMENT PORTFOLIO

     The following table presents the book or market value of our investment
portfolio as of December 31 of 2002, 2003, 2004, 2005 and 2006:

                                                      IN  MILLIONS OF NIS
                                        ------------------------------------------------
                                        2006*      2005*      2004*     2003**     2002**
                                        ----       ----       ----       ----       ----

Marketable Government bonds                -          -          -          -        0.1

Marketable other bonds                     -          -        0.2        7.2       13.0

Non-marketable other bonds               0.7        2.6        3.5        7.9       19.3
Non-marketable shares                   16.7       29.6       30.5       34.3       25.7

Marketable and available for sale
shares                                  33.0       31.0       25.8       36.0       13.5

Trading shares                             -          -          -          -          -
                                        ----       ----       ----       ----       ----

Total                                   50.4       63.2       60.0       85.4       71.6
                                        ====       ====       ====       ====       ====

EQUITY HOLDINGS PORTFOLIO

     The following table presents the book value of our investments in other
equity holdings as of December 31, 2002, 2003, 2004, 2005 and 2006:

                                                      IN  MILLIONS OF NIS
                                    --------------------------------------------------------
                                    2006*      2005*       2004*       2003**         2002**
                                    -----      -----       -----       ------         ------

Investments in related companies      -          -           -            -             0.9

INTERNATIONAL OPERATIONS

     We have no material operations outside of Israel and our past and current
operations concentrate on the Israeli market.

     * Reported Amounts

     ** Adjusted Amounts

                                       34
```

```

LOAN PORTFOLIO

     TOTAL CREDIT TO THE PUBLIC

     As of December 31, 2006, the total credit to the public amounted to NIS
6,519 million compared with NIS 7,681 million as of December 31, 2005. These
figures include credit guaranteed by the State of Israel and granted to the
Israel Electric Corporation Ltd. out of a deposit that was deposited with us by
the State of Israel for that purpose, the balance of which amounted to NIS 5,671
million as of December 31, 2006 compared with NIS 6,405 million as of December
31, 2005. Net of such credit, the credit to the public amounted to NIS 848
million as of December 31, 2006 compared with NIS 1,276 million as of December
31, 2005 (a 34% decrease). The above figures are after deduction of allowance
for doubtful debts. This decrease stemmed mainly from our policy to reduce our
credit portfolio and was also affected by the allowances for doubtful debts that
were recorded in the past year. As of March 31, 2007, total credit to the public
amounted to NIS 789 million (excluding credit guaranteed by the State of Israel
and granted to the Israel Electric Corporation Ltd. out of a deposit that was
deposited with us by the State of Israel for that purpose), which reflects a
decline of NIS 59 million (approximately 7%) compared to the balance outstanding
as of December 31, 2006.

ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS

     The following tables show, by business sector, the related risk
counterparties to whom our counterparty risk exposures were allocated in the
last five years.

                                       35
```

```

CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS
REPORTED AMOUNTS
                                                                                             DECEMBER 31, 2006
                                              ---------------------------------------------------------------------------------------------------------------
                                                                                            ANNUAL
                                                                                          EXPENSE FOR
                                                                          TOTAL RISK          THE                                                  % OF SECTOR
                                                           OFF-BALANCE        OF            SPECIFIC                                 TOTAL RISK     FROM TOTAL
                                              BALANCE         SHEET         CREDIT         ALLOWANCE     BALANCE OF                    NET OF          RISK
                                               SHEET          CREDIT          TO          FOR DOUBTFUL   PROBLEMATIC   GOVERNMENT    GOVERNMENT    NET OF GOV'T
                                           CREDIT RISK (1)   RISK (2)       PUBLIC           DEBTS      DEBTS (3)(5)   GUARANTEES    GUARANTEES     GUARANTEES
                                              -------         -------       -------         -------       -------       -------       -------         -------
                                                                                                NIS MILLIONS
                                              ---------------------------------------------------------------------------------------------------------------

Agriculture                                       5.6             0.3           5.9             1.4           0.7             -           5.9             0.6%
Industry                                        338.7            14.4         353.1             7.2         221.9             -         353.1            32.6%
Construction and real estate                    156.4            71.3         227.7             7.5         193.9             -         227.7            21.0%
Electricity                                   5,795.8             3.7       5,799.5               -          34.9         5,671         128.5            11.8%
Commerce                                         31.0             5.7          36.7             2.1          28.3             -          36.7             3.4%
Restaurants and hotels                           11.6             2.1          13.7             0.7           8.6             -          13.7             1.3%
Transport and storage                            23.0               -          23.0             0.1           0.5             -          23.0             2.1%
Communications and computer services              7.9               -           7.9            (1.1)          7.2             -           7.9             0.7%
Financial services                               45.2            84.0         129.2             1.3          23.0             -         129.2            11.9%
Other business services                          54.4             2.5          56.9             6.7          31.9             -          56.9             5.2%
Public and community services                    97.2             0.2          97.4             1.2          32.0             -          97.4             9.0%
Private households                                4.7               -           4.7             0.5           0.3             -           4.7             0.4%
                                              -------         -------       -------         -------       -------       -------       -------         -------
Total                                         6,571.5           184.2       6,755.7            27.6         583.2         5,671       1,084.7           100.0%
                                              =======         =======       =======         =======       =======       =======       =======         =======
Credit risk included in the
 various economic sectors:
Agricultural settlement movements (4)           208.9             2.8         211.7             2.1          94.0
Local authorities and entities
controlled by them                                6.5               -           6.5             -               -

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2006 was NIS 658.3 million.

                                       36
```

```

CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS
REPORTED AMOUNTS
                                                                                            DECEMBER 31, 2005
                                             -----------------------------------------------------------------------------------------------------------------
                                                                                            ANNUAL
                                                                                          EXPENSE FOR
                                                                         TOTAL RISK          THE                                                    % OF SECTOR
                                                           OFF-BALANCE       OF            SPECIFIC                                   TOTAL RISK     FROM TOTAL
                                             BALANCE         SHEET         CREDIT         ALLOWANCE     BALANCE OF                      NET OF          RISK
                                              SHEET          CREDIT          TO          FOR DOUBTFUL  PROBLEMATIC    GOVERNMENT      GOVERNMENT    NET OF GOV'T
                                          CREDIT RISK (1)   RISK (2)       PUBLIC           DEBTS      DEBTS(3)(5)   GUARANTEES      GUARANTEES     GUARANTEES
                                             -------         -------       -------         -------       -------       -------         -------         -------
                                                                                                NIS MILLIONS
                                             -----------------------------------------------------------------------------------------------------------------

Agriculture                                     12.3             0.3          12.6               -          10.0             -            12.6             0.8%
Industry                                       462.4            45.6         508.0            15.5         304.9           2.7           505.3            33.1%
Construction and real estate                   291.0            33.8         324.8            31.7         247.9           1.8           323.0            21.1%
Electricity                                  6,549.7             1.7       6,551.4            19.0          42.5         6,405           146.4             9.6%
Commerce                                        42.9             5.9          48.8             2.5          32.3             -            48.8             3.2%
Restaurants and hotels                          15.2             2.4          17.6             0.9          13.0             -            17.6             1.2%
Transport and storage                           27.1               -          27.1             0.1           7.5             -            27.1             1.8%
Communications and computer services             8.4               -           8.4             1.3           7.6             -             8.4             0.6%
Financial services                             114.5           100.9         215.4           (17.7)         45.6             -           215.4            14.1%
Other business services                         92.0             3.4          95.4             3.4          46.5             -            95.4             6.2%
Public and community services                  119.0             1.2         120.2            (0.5)         40.8             -           120.2             7.9%
Private households                               6.4               -           6.4               -           0.5             -             6.4             0.4%
                                             -------         -------       -------         -------       -------       -------         -------         -------
Total                                        7,740.9           195.2       7,936.1            56.2         799.1       6,409.5         1,526.6          100.00%
                                             =======         =======       =======         =======       =======       =======         =======         =======
Credit risk included in the
 various economic sectors:
Agricultural settlement movements (4)          254.2             3.0         257.2            (1.5)        119.1
Local authorities and entities
controlled by them                               9.9               -           9.9               -             -

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2005 was NIS 675.6 million.

                                       37
```

```

CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS (CONT.)
 REPORTED AMOUNTS
                                                                                            DECEMBER 31, 2004
                                             -------------------------------------------------------------------------------------------------------------------
                                                                                            ANNUAL
                                                                                          EXPENSE FOR
                                                                         TOTAL RISK          THE                                                     % OF SECTOR
                                                           OFF-BALANCE       OF            SPECIFIC                                   TOTAL RISK      FROM TOTAL
                                             BALANCE         SHEET         CREDIT         ALLOWANCE     BALANCE OF                      NET OF           RISK
                                              SHEET          CREDIT          TO          FOR DOUBTFUL  PROBLEMATIC     GOVERNMENT      GOVERNMENT    NET OF GOV'T
                                         CREDIT RISK (1)**  RISK (2)**     PUBLIC           DEBTS      DEBTS (3)(5)    GUARANTEES      GUARANTEES     GUARANTEES
                                             -------         -------       -------         -------       -------         -------         -------         -------
                                                                                            IN MILLIONS OF NIS
                                             -------------------------------------------------------------------------------------------------------------------

Agriculture                                      14.9            0.3          15.2             0.7          10.6             0.2              15             0.7%
Industry                                        595.4           53.5         648.9            29.8         331.4             5.3           643.6            30.0%
Construction and real estate                    447.3           84.2         531.5            24.3         395.1             4.3           527.2            24.6%
Electricity                                   6,341.9            4.6       6,346.5             2.6          86.1         6,167.3           179.2             8.4%
Commerce                                         65.7            9.5          75.2             4.2          32.8             0.2              75             3.5%
Restaurants and hotels                           42.3            2.5          44.8             0.5          35.1               -            44.8             2.1%
Transport and storage                            32.4              -          32.4               -           0.2               -            32.4             1.5%
Communications and computer services             44.2            0.1          44.3            (0.5)         18.8               -            44.3             2.1%
Financial services                              159.8           98.0         257.8             4.7          83.1               -           257.8            12.0%
Other business services                         127.3            2.3         129.6            10.6          43.3               -           129.6             6.0%
Public and community services                   184.9            1.2         186.1             1.1          88.8               -           186.1             8.7%
Private households                                9.7              -           9.7             1.1           0.8               -             9.7             0.5%
                                              -------        -------       -------         -------       -------         -------         -------         -------
TOTAL                                         8,065.8          256.2       8,322.0            79.1       1,126.1         6,177.3         2,144.7          100.00%
                                              =======        =======       =======         =======       =======         =======         =======         =======
Credit risk included in the
 various industry sectors:
Agricultural settlement movements (4)           291.5            5.6         297.1            (1.8)        124.7
Local authorities and entities
controlled by them                               22.5              -          22.5               -           1.9

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2004 was NIS 714.4 million.

                                       38
```

```

CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS (CONT.)
ADJUSTED AMOUNTS
                                                                                            DECEMBER 31, 2003
                                             -------------------------------------------------------------------------------------------------------------------
                                                                                            ANNUAL
                                                                                          EXPENSE FOR
                                                                         TOTAL RISK          THE                                                     % OF SECTOR
                                                           OFF-BALANCE       OF            SPECIFIC                                     TOTAL RISK     FROM TOTAL
                                             BALANCE         SHEET         CREDIT         ALLOWANCE     BALANCE OF                        NET OF          RISK
                                              SHEET          CREDIT          TO          FOR DOUBTFUL  PROBLEMATIC     GOVERNMENT      GOVERNMENT    NET OF GOV'T
                                        CREDIT RISK (1)**  RISK (2)**       PUBLIC          DEBTS      DEBTS (3)(5)    GUARANTEES      GUARANTEES     GUARANTEES
                                             -------         -------       -------         -------       -------         -------         -------         -------
                                                                                            IN MILLIONS OF NIS
                                             -------------------------------------------------------------------------------------------------------------------

Agriculture                                     25.0               -          25.0               -           7.7             0.3            24.7             0.8
Industry                                       922.5            90.5       1,013.0            66.1         4,713            20.1           992.9            30.5
Construction and real estate                   524.9           135.3         660.2            18.8         433.8             4.5           655.7            20.1
Electricity                                  6,575.2            17.7       6,593.9             1.2          66.6         6,405.3           188.6             5.8
Commerce                                        97.5             6.1         103.6             4.9          47.3               -           103.6             3.2
Restaurants and hotels                          83.1            31.9         115.0             6.8          77.0             2.5           112.5             3.5
Transport and storage                           90.5             0.2          90.8             0.1           0.2               -            90.8             2.8
Communications and computer services            93.5             8.8         102.3             7.8          29.4               -           102.3             3.1
Financial services                             344.8           109.2         454.0            10.0         121.1               -           454.0            13.9
Other business services                        264.9             2.8         267.7             6.7          43.6               -           267.7             8.2
Public and community services                  233.8             1.3         235.1            11.5         146.6               -           235.1             7.2
Private households                              27.5             0.8          28.2               -           2.8               -            28.2             0.9
                                             -------         -------       -------         -------       -------         -------         -------         -------
TOTAL                                        9,283.2           404.6       9,688.8           133.9       1,447.4         6,432.7         3,256.1           100.0
                                             =======         =======       =======         =======       =======         =======         =======         =======
Credit risk included in the
 various industry sectors:
Agricultural settlement movements (4)          345.7             5.4         351.1            10.2        163.3
Local authorities and entities
controlled by them                              28.6               -          28.6               -          1.9

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2003 was NIS 732.5 million.

                                       39
```

```

CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS (CONT.)
 ADJUSTED AMOUNTS

                                                                                             DECEMBER 31, 2002
                                              ----------------------------------------------------------------------------------------------------------------------
                                                                                              ANNUAL
                                                                                            EXPENSE FOR
                                                                            TOTAL RISK          THE                                                     % OF SECTOR
                                                             OFF-BALANCE        OF            SPECIFIC                                    TOTAL RISK     FROM TOTAL
                                              BALANCE           SHEET         CREDIT         ALLOWANCE     BALANCE OF                       NET OF          RISK
                                               SHEET            CREDIT          TO          FOR DOUBTFUL  PROBLEMATIC      GOVERNMENT      GOVERNMENT    NET OF GOV'T
                                         CREDIT RISK (1)**    RISK (2)**      PUBLIC           DEBTS      DEBTS (3)(5)     GUARANTEES      GUARANTEES     GUARANTEES
                                              --------         --------      --------         --------      --------        --------        --------        --------
                                                                                            IN MILLIONS OF NIS
                                              ----------------------------------------------------------------------------------------------------------------------

Agriculture                                       35.7              0.2          35.9              0.3          12.8             2.1            33.8             0.7
Industry                                       1,506.4            219.2       1,725.6            112.4         517.9            80.1         1,645.5            34.3
Construction and real estate                     558.3            210.1         768.4             74.4         331.0             4.8           763.6            15.9
Electricity                                    7,051.0             52.7       7,103.7              6.2          19.5         6,919.8           183.9             3.8
Water                                              0.2                -           0.2                -             -               -             0.2               -
Commerce                                         137.8             15.8         153.6             20.3          58.9             4.5           149.1             3.2
Restaurants and hotels                            95.4             32.7         128.1             22.8         110.4               -           128.1             2.7
Transport and storage                            126.0              5.3         131.3              1.2          47.7               -           131.3             2.7
Communications and computer services             175.4             12.0         187.4             16.5          59.9               -           187.4             3.9
Financial services                               521.3            216.1         737.4             82.7          92.6               -           737.4            15.4
Other business services                          478.3             12.6         490.9             11.5          46.5               -           490.9            10.2
Public and community services                    294.1              2.9         297.0             39.1         145.4               -           297.0             6.2
Private households                                42.9              3.6          46.5              4.4           9.2               -            46.5             1.0
                                              --------         --------      --------         --------      --------        --------        --------        --------
Total                                         11,022.8            783.2      11,806.0            391.6       1,451.8         7,011.3         4,794.7           100.0
                                              ========         ========      ========         ========      ========        ========        ========        ========
Credit risk included in the
 various industry sectors:
Agricultural settlement movements (4)            464.2             41.4         505.6             19.3         214.5
Local authorities and entities
 controlled by them                               58.0                -          58.0                -           4.3

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2002 was NIS 617.3 million.

                                       40
```

```

MATURITY DISTRIBUTION OF CREDIT TO THE PUBLIC BY LINKAGE BASIS SEGMENTS

     The following table sets forth the maturity profile of our credit to the
public by linkage basis segments as of December 31, 2006. In this table, the
future cash flows in respect of assets and liabilities are presented according
to linkage base, and in accordance with the remaining period to the contractual
maturity date of each cash flow.

                                                                   IN MILLIONS OF NIS
                                            --------------------------------------------------------------------
                                               UP     BETWEEN     BETWEEN 6     BETWEEN     MORE
LINKAGE                                       TO 3     3 AND         AND         1 AND      THAN
BASIS                                        MONTHS   6 MONTHS    12 MONTHS     5 YEARS    5 YEARS        TOTAL
                                            --------  --------    --------      --------   --------     --------

Non-Linked Israeli currency                    125.8      10.5        25.5          70.6        3.3        235.7
CPI-linked Israeli Currency                     29.3      24.4        42.0         273.7      252.1        621.5
Foreign Currency and linked thereto            196.1     154.1       311.2       2,436.1    6,621.8      9,714.3
                                            --------  --------    --------      --------   --------     --------
TOTAL                                          351.2     189.0       378.7       2,780.4    6,877.2     10,576.5
                                            ========  ========    ========      ========   ========     ========

Balances of current accounts and credits which have matured are included in the
up to 3 months category.

DEVELOPMENT OF CREDIT RISK IN RESPECT OF PROBLEMATIC BORROWERS

     The following table sets forth comparative data on the development of the
overall credit risk in respect of problematic borrowers (not including
problematic debts that are covered by collateral that is deductible for purposes
of individual borrower and borrower group indebtedness limitations) (Proper
Banking Procedure No. 313):

                                                                       AS OF DECEMBER 31
                                                    -----------------------------------------------------------
                                                      2006        2005        2004          2003          2002
                                                    -------     -------     -------       -------       -------

Non income bearing                                    171.2       267.0       400.2         571.6        *589.3
Restructured (2)                                       74.1        97.9       108.3          34.7          62.4
Designated for restructuring (3)                       26.9        13.5        24.3          54.2          16.8
Temporarily in arrears                                 14.5        64.2       117.9         102.4         130.2
Under special supervision**                           208.5       282.8       353.8         497.2         464.6
                                                    -------     -------     -------       -------       -------

Total balance sheet credit to
   problematic borrowers (1)                          495.2       725.4     1,004.5       1,260.1       1,263.3
                                                    =======     =======     =======       =======       =======

 Off-balance sheet credit risk in respect of
   problematic borrowers (1)                           88.0        73.7       121.6         187.2         188.4
Debentures of problematic borrowers                       -           -           -           0.1           0.2
                                                    -------     -------     -------       -------       -------
Overall credit risk in respect of problematic
   borrowers (1) (4)                                  583.2       799.1     1,126.1       1,447.4       1,451.9
                                                    =======     =======     =======       =======       =======

*    Including a loan to a customer that was classified as non-income bearing,
     and according to instructions of Bank of Israel was reclassified in 2003 to
     the "Securities" item (see Note 4 to the financial statements in Item 17).

**   Including NIS 183.1 million as of December 31, 2006 in respect of debts for
     which a specific allowance exists (NIS 74.9 million as of December 31,
     2005, NIS 116.1 million as of December 31, 2004, NIS 136.1 million as of
     December 31, 2003 and NIS 237.5 as of December 31, 2002).

                                       41
```

```

(1)  Not including problematic debts that are covered by collateral that is
     deductible for purposes of individual borrower and borrower group
     indebtedness limitations (Proper Banking Procedure No. 313).

(2)  Credit that was restructured in the current year and credit that was
     restructured in prior years with waiver of income.

(3)  Credit to borrowers in respect of which there is an as yet unimplemented
     decision by management to restructure their debt.

(4)  As calculated for purposes of individual borrower and borrower group
     indebtedness limitations, except in respect of guarantees granted by a
     borrower as security for the debt of a third party.

     The data presented above indicates the high volume of debts that are
classified as non-income bearing in relation to total credit to the public. The
interest revenue in respect of those debts, which will not be included in
financing income, will have a negative impact on our results of operations in
the future, as long as the debts continue to be classified as non-income
bearing. Interest income that was not credited to income for non-income bearing
debts for the year ending December 31, 2006 was NIS 23 million, in comparison to
NIS 28 million for the year ending December 31, 2005, and NIS 59 million for the
year ending December 31, 2004.

     According to our policy, a loan is classified as non-income bearing if the
loan is in arrears and management's evaluation is that the arrears are not
temporary.

                                       42
```

```

LOAN CONCENTRATION

     The following table sets forth our credit risk exposure to the largest six
borrowers/borrower groups as defined by the Proper Banking Procedures of the
Bank of Israel, for the five years ending on December 31, 2006, 2005, 2004,
2003, and 2002:

                                                            IN MILLIONS OF NIS

                                     2006         2005           2004        2003            2002
                                    ------       ------         ------      ------          ------
                                                Reported                           Adjusted
                                                 Amounts                            Amounts
                                    ----------------------------------      ----------------------

Credit risk exposure to
the largest six
borrowers/borrower groups*          368.6          433.2          542.3       595.5          783.0
Total credit to the
public**                          6,519.1        7,680.7        7,993.4     9,189.6       10,908.1
Percentage of the
borrower/borrower group of
the total credit to the               5.7%           5.6%           6.8%        6.5%           7.2%
public

*    The credit risk exposure is calculated according to the Proper Banking
     Procedures of the Supervisor of Banks (Israel) and consequently, the
     amounts are presented after the deduction of certain types of collateral,
     such as State of Israel guarantees.

**   The amount of total credit to the public includes a credit to the Israel
     Electric Corporation Ltd., guaranteed by the State of Israel which was
     granted out of a deposit that was deposited with us by the State of Israel
     for that purpose and the outstanding balance of which, for each of the
     above years , was as follows:

          o    December 31, 2006* - NIS 5,671.0 million

          o    December 31, 2005* - NIS 6,405.0 million

          o    December 31, 2004* - NIS 6,167.3 million

          o    December 31, 2003** - NIS 6,405.3 million

          o    December 31, 2002** - NIS 6,925.2 million

          * Reported Amounts

          ** Adjusted Amounts

                                       43
```

```

ANALYSIS OF SPECIFIC ALLOWANCES FOR DOUBTFUL DEBTS BY BUSINESS SECTORS

The following table details our annual expense for specific allowances for
doubtful debts, according to business sectors, for each of the past five years:

                                           2006                    2005                     2004                    2003                  2002
                                    -------------------     -------------------     -------------------     -------------------   -------------------
                                    REPORTED                REPORTED                REPORTED                ADJUSTED              ADJUSTED
                                    AMOUNTS                 AMOUNTS                 AMOUNTS                 AMOUNTS               AMOUNTS
                                    -------                 -------                 -------                 -------               -------
                                       IN                     IN                      IN                      IN                    IN
                                    MILLIONS                MILLIONS                MILLIONS                MILLIONS              MILLIONS
                                     OF NIS        %        OF NIS         %        OF NIS         %        OF NIS         %      OF NIS         %
                                    -------     -------     -------     -------     -------     -------     -------     -------   -------     -------

Agriculture                             1.4           5           -           -         0.7           1           -           -       0.3           -
Industry                                7.2          26        15.5          28        29.8          38        66.1          49     112.2          29
Construction and real estate            7.5          27        31.7          56        24.3          31        18.8          14      74.4          19
Electricity                               -           -        19.0          34         2.6           3         1.2           1       6.2           2
Commerce                                2.1           8         2.5           4         4.2           5         4.9           4      20.3           5
Restaurants and hotels                  0.7           3         0.9           2         0.5           1         6.8           5      22.8           6
Transport and storage                   0.1           -         0.1           -           -           -         0.1           -       1.2           -
Communications and computer
services                               (1.1)         (4)        1.3           2        (0.5)         (1)        7.8           6      16.5           4
Financial services                      1.3           5       (17.7)        (31)        4.7           6        10.0           7      82.7          21
Other business services                 6.7          24         3.4           6        10.6          14         6.7           5      11.5           3
Public and community services           1.2           4        (0.5)         (1)        1.1           1        11.5           9      39.1          10
Private households                      0.5           2           -           -         1.1           1           -           -       4.4           1
TOTAL                                  27.6         100        56.2         100        79.1         100       133.9         100     391.6         100
                                    -------     -------     -------     -------     -------     -------     -------     -------   -------     -------
Credit risk included in the
various industry sectors:
Agricultural settlement
movements                               2.1           8        (1.5)         (3)       (1.8)         (2)       10.2           8      19.3           5
Local authorities                         -           -           -           -           -           -           -           -         -           -

                                       44
```

```

DEPOSITS

     The following tables provide an analysis of the maturity of deposits as of
December 31, 2006. In the tables below the future cash flows in respect of
assets and liabilities are presented according to linkage base, and in
accordance with the remaining period to the contractual maturity date of each
cash flow.

DEPOSITS OF THE PUBLIC AS OF DECEMBER 31, 2006

                                                                     IN MILLIONS OF NIS
                                                 ----------------------------------------------------------
                                                   UP         BETWEEN      BETWEEN 6      MORE
LINKAGE                                           TO 3         3 AND        AND 12        THAN
SEGMENT                                          MONTHS      6 MONTHS       MONTHS       1 YEAR       TOTAL
                                                 ------      --------       ------       ------       -----

Non-Linked Israeli currency                       27.5           0.5          3.0            -         88.1
CPI-linked Israeli Currency                        3.1           2.0          5.0         28.0         38.1
Foreign Currency and linked thereto                2.0           0.1          1.5            -          3.6

DEPOSITS OF THE GOVERNMENT AS OF DECEMBER 31, 2006

                                                                   IN MILLIONS OF NIS
                                                ---------------------------------------------------------
                                                  UP         BETWEEN      BETWEEN 6     MORE
LINKAGE                                          TO 3         3 AND        AND 12       THAN
SEGMENT                                         MONTHS       6 MONTHS      MONTHS      1 YEAR       TOTAL
                                                ------       --------      ------      ------       -----

CPI- linked Israeli Currency                      29.2          16.9         29.6       261.4        331.1
Foreign Currency and linked thereto              154.6         151.7        306.3     9,021.9      9,634.5

C.   ORGANIZATIONAL STRUCTURE

     Not applicable.

D.   PROPERTY, PLANTS AND EQUIPMENT

     Until September 14, 2003, our offices, which we leased, were located at
Asia House, 4 Weizman Street, Tel Aviv, Israel. These premises encompassed
approximately 30,000 square feet.

     In connection with the Run-Off Plan and the efficiency plan approved by our
Board and the reduction in the number of employees, all of our operations moved
on September 14, 2003 to a smaller office located at 82 Menachem Begin Road, Tel
Aviv, Israel.

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     THE FINANCIAL INFORMATION PRESENTED IN THIS ITEM BELOW IS BASED ON ISRAELI
GAAP, WHICH MAY DIFFER MATERIALLY FROM U.S. GAAP. FOR A RECONCILIATION OF OUR
FINANCIAL INFORMATION TO U.S. GAAP, SEE "ITEM 3.A. SELECTED FINANCIAL DATA" AND
"ITEM 17. FINANCIAL STATEMENTS."

     SUMMARY

     Until the liquidity crisis we experienced in the third quarter of 2002,
which stemmed from the withdrawals of deposits by the public, our business
focused on regular banking activities, including, without limitation, the
extension of short, medium and long term credit in NIS and foreign currencies,
the acceptance of deposits in all currencies, the maintenance of checking
accounts and the issuance of credit cards. In addition, we issued guarantees of
all types in Israel and abroad and issued letters of credit and other documents
relating to foreign trade. As of June 30, 2002, the balance of the public's
deposits with us was NIS 3,597 million, which decreased to NIS 1,291 million as
of December 31, 2002. As a result of the increased withdrawals of deposits by
the public, we began to experience a severe liquidity crisis. By December 31,
2003 the balance of the public's deposits with us had declined to only NIS 620
million, and by December 31, 2006, to NIS 67 million.

     In response to the liquidity crisis, the Government of Israel and the Bank
of Israel proposed a plan for the ultimate sale of our assets and liabilities to
a third party. Until the sale, however, the Bank of Israel agreed to provide us
a special line of credit to help us manage our liquidity crisis and continue our
operations. See "Item 4. Information on the Company-Business Overview-Proposed
Sale of the Bank and Extension of Special Line of Credit by the Bank of Israel"
for a detailed description of the proposed sale and the special line of credit
from the Bank of Israel.

     The "en bloc" sale of our asset and liability portfolio within a short time
frame was not consummated and, on February 27, 2003, our Board of Directors
adopted a Run-Off Plan for our business, a modified version of which was
approved by the Government of Israel. On July 26, 2005, our Board of Directors
decided to extend the term of the Run-Off Plan until July 31, 2008, and on
October 10, 2005, the Government of Israel approved the extension. The ultimate
goal of the Run-Off Plan is the controlled realization of our credit assets over
a period expiring in July 2008. For a more detailed description of the Run-Off
Plan and the amendments to the special line of credit, see "Item 4. Information
on the Company-Business Overview-Adoption of the Run-Off Plan and Amendment of
the Special Line of Credit."

     Currently, the Ministry of Finance and the Government Companies Authority
are considering a possible plan for the sale and/or transfer of all of our
issued and outstanding share capital to a third party, by: (a) sale and/or
transfer of all of the Bank's shares held by the State and the three large
banking groups to a designated purchaser; (b) the purchase by the designated
purchaser of our shares held by the public and traded on the Tel Aviv Stock
Exchange, and within the framework of an arrangement plan pursuant to Section
350 of the Companies Law that would require the approval of the court and the
affirmative vote of a special majority of our public shareholders; and (c) the
redemption of the D Shares and DD Shares held by the public, including the
payment of the preferred dividends in arrears for these shares (as required by
their terms in the event of redemption).

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     As part of the examination of the plan, the Government Companies Authority
published a request for information ("RFI") where parties interested in
purchasing our shares pursuant to the proposed plan were invited to give notice
of their interest in the purchase. On July 4, 2007, the Government Companies
Authority advised us that in reply to the Authority's above publication, the
Authority received eleven applications from companies and individuals and they
will examine the various applications in the near future.

     It is not known if the plan currently under examination will in fact be
adopted or implemented. This question will be influenced, among other things,
from the response and reaction to the RFI and the willingness of the three
banking groups to dispose of their holdings. In addition, the sale of the
State's holdings in the Bank requires the adoption of a resolution by the
Ministerial Privatization Committee.

     In a letter dated May 1, 2007, the Bank of Israel notified us that if the
proposed plan for the sale and/or transfer of our shares is implemented prior to
August 1, 2008, our banking license will be revoked on the date of the
implementation of the plan.

     For the fiscal year ended December 31, 2006, we had a loss of NIS 17.1
million, compared with a loss of NIS 8.4 million in 2005. Our profits from
financing operations before the provision for doubtful debts amounted to NIS
18.2 million in 2006 compared to NIS 61.6 million in the previous year. Our
after-tax loss from ordinary operations amounted to NIS 17.1 million in 2006
compared to a loss of NIS 8.4 million in 2005.

A.   OPERATING RESULTS

     For the fiscal year ended December 31, 2006, we had a loss of NIS 17.1
million, compared with a loss of NIS 8.4 million in 2005 and a profit of NIS 1.4
million in 2004.

     Our total balance sheet as of December 31, 2006 amounted to NIS 7,516
million as compared to NIS 8,721 million at December 31, 2005 and NIS 9,078
million as of December 31, 2004. Credit to the public amounted to NIS 6,519
million, which represented approximately 86.7% of our total balance sheet.

     Our profits from financing operations before the provision for doubtful
debts amounted to NIS 18.2 million in 2006 compared to NIS 61.6 million in 2005
and NIS 66.2 million in 2004. Our after-tax loss from ordinary operations
amounted to NIS 17.1 million in 2006 compared to a loss of NIS 8.4 million in
2005 and a profit of NIS 1.2 in 2004. The decrease in profits from financing
operations resulted mainly from the following:

The decrease in profit from financing operations resulted mainly from the
following:

     o    THE DECREASE IN THE VOLUME OF OUR FINANCING ACTIVITY. The balance of
          credit to the public (not including credit out of a deposit of the
          State and guaranteed by the State) as at December 31, 2006 totaled NIS
          848 million, compared with NIS 1,276 million as at December 31, 2005,
          and NIS 1,826 million as at December 31, 2004. The average balance of
          this credit to the public in 2006, as included in the tables on the
          rates of financing income and expenses, amounted to NIS 1,104 million
          compared with NIS 1,558 million in 2005, a decrease of NIS 454 million
          or 29% in the average balance of credit to the public. The average
          balance of this credit to the public in 2004 amounted to NIS 2,552
          million.

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     o    THE DECREASE IN THE INCOME FROM INTEREST THAT WAS COLLECTED ON
          PROBLEMATIC DEBTS. The income from this component amounted to NIS 9.4
          million in 2006 compared with NIS 21.6 million in 2005, and NIS 10.5
          million in 2004.

     o    THE IMPACT OF THE INCREASE IN INTEREST RATES IN THE ECONOMY ON THE
          EXTENT OF NON-ACCRUAL OF INCOME IN RESPECT OF NON-INTEREST BEARING
          DEBT. The average interest rate in 2006 was higher than in 2005 and,
          as a result, the impact on the profit from financing activity was
          greater. In the fourth quarter of 2006, the interest rate in the
          economy started decreasing.

     Another factor that had an impact on the decrease in profit from financing
activity in 2006 versus 2005 was the fact that, in those two years, we had an
excess of assets in the CPI-linked segment and in the foreign currency segment.
In 2006 this excess, including the effect of derivatives, amounted on average to
NIS 167 million (prior to the provision for doubtful debts), compared to NIS 183
million in 2005. This excess was financed by unlinked liabilities. In 2006, the
rate of return on the assets in these segments (including linkage differences
and exchange rate differences which were negative) was lower than the cost of
the unlinked sources, resulting in a decrease in profit from financing activity.
In 2005, the return on the uses of these segments was higher than the cost of
the sources, resulting in an increase in profit from financing activity in that
year.

     Our annual expense for allowance for doubtful debts amounted to NIS 21.7
million in 2006 compared with NIS 44.2 million in 2005 and NIS 70.2 million in
2004. The specific allowance for doubtful debts in 2006 amounted to NIS 27.6
million, compared with NIS 56.2 million in 2005 and NIS 79.1 million in 2004. An
analysis of the changes in the allowance as described in Note 4.C of the
financial statements, indicates a decrease in the specific allowance in 2006 in
the total amount of NIS 12.0 million compared with NIS 26.4 million in 2005 and
NIS 16.5 million in 2004. The supplementary allowance for doubtful debts
reflected a decrease of NIS 5.9 million, compared with a decrease of NIS 12.0
million in 2005 and NIS 12.3 million in 2004. The decrease in the supplementary
allowance is mainly a result of the decrease in the volume of problematic debts
in general and the decrease in the volume of non-income bearing debts in
particular. This decrease was gradual and was reflected in the quarterly
financial statements of both 2006 and 2005. The decrease in the supplementary
allowance in 2005 was also affected by the Supervisor of Banks' approval to
cancel a supplementary allowance of NIS 0.9 million, that had been recorded in
the past in respect of the debt of a customer which according to the instruction
of the Supervisor of Banks was classified to the "Securities" item.

     It is worth noting that the balance of credit as at December 31, 2006, net
of the credit to the Israel Electric Corporation Ltd. which is guaranteed by the
State of Israel, and before the supplementary and general allowance for doubtful
debts amounted to NIS 900 million (NIS 1,334 million as at December 31, 2005 and
NIS 1,893 million as at December 31, 2004). The balance of the supplementary and
general allowances for doubtful debts amounted to NIS 52 million, or 5.8% of the
balance of the aforementioned credit (NIS 58 million which constituted 4.3% of
the balance as at December 31, 2005 and NIS 67 million which constituted 3.5% of
the balance on December 31, 2004).

                                       48
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     Following are comparative data on the development of the overall credit
risk in respect of problematic borrowers(1) (in NIS millions):

                                                                            AS AT DECEMBER 31,
                                                                            -----------------
                                                                            2006         2005
                                                                            -----       -----

Non income bearing                                                          171.2       267.0
Restructured (2)                                                             74.1        97.9
Designated for restructuring (3)                                             26.9        13.5
Temporarily in arrears                                                       14.5        64.2
Under special supervision**                                                 208.5       282.8
                                                                            -----       -----
Total balance sheet credit to problematic borrowers (1)                     495.2       725.4
Off-balance sheet credit risk in respect of problematic borrowers (1)        88.0        73.7
                                                                            -----       -----

Overall credit risk in respect of problematic borrowers (1) (4)             583.2       799.1
                                                                            =====       =====

**   Including an amount of NIS 183.1 million (NIS 74.9 million on December 31,
     2005) in respect of debts for which a specific allowance exists.

(1)  Not including problematic debts that are covered by collateral that is
     deductible for purposes of individual borrower and borrower group
     limitations (Proper Banking Procedure Directive No. 313).

(2)  Credit that was restructured in the current year and credit that was
     restructured in prior years with waiver of income.

(3)  Credit to borrowers in respect of which there is a yet unimplemented
     management decision to restructure their debt.

(4)  As calculated for purposes of individual borrower and borrower group
     limitations, except in respect of guarantees granted by a borrower as
     security for the debt of a third party.

     The data presented above indicates a decrease in the volume of problematic
debts in general and in the volume of debts classified as non-income bearing in
particular. The decrease in the volume of debts classified as non-income bearing
is a result of a combination of the following factors: the collection of debts
from customers that were classified as non-income bearing, arrangements with
part of the aforementioned customers, which are reflected in the amount of
restructured debts, and allowances for doubtful debts that were created in
respect of borrowers whose debt is classified as non-income bearing.

     Nonetheless, the data presented above indicates the high proportion of
debts, that are classified as non-income bearing, of the total credit to the
public. The interest charges in respect of those debts, which will not be
included in financing income, will have a negative impact on our results of
operations in the future, as long as the debts continue to be classified as
non-income bearing. It should be emphasized that regardless of the decrease in
the volume of non-income bearing debts, due to our policy of collecting credit,
the negative effect of the aforementioned debt on the financial results will
continue to be significant. In this respect it is noted that the amount of
interest that will not be included in income will be affected by the volume of
the non-income bearing debt and the market interest rate. If the interest rate
of the Bank of Israel increases, the negative effect of the non-income bearing
debt on the amount of financing income will be higher.

                                       49
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     The increase in the volume of the off-balance sheet credit risk in respect
of problematic borrowers derives from the indemnification issued by us in favor
of the receivers that were appointed to realize the assets of the companies
undergoing legal proceedings. The writs of indemnification are in respect of
receipts that were credited to the borrowers' accounts with us out of the
proceeds from the realization of the assets.

TOTAL ASSETS

     Our total assets as of December 31, 2006 decreased to NIS 7,516 million as
compared to NIS 8,721 million as of December 31, 2005 and NIS 9,078 million as
of December 31, 2004. The main component of the net change in the total assets
was the reduction of our credit portfolio, which decreased from NIS 7,993 as of
December 31, 2004 to NIS 7,681 million as of December 31, 2005 and to NIS 6,519
million as of December 31, 2006 (a decrease of 15% in the last year). The above
figures include a state guaranteed credit to the Israel Electric Corporation
Ltd.(NIS 5,671 million as of December 31, 2006, NIS 6,405 million as of December
31, 2005 and NIS 6,167 million as of December 31, 2004), granted out of a
deposit that was deposited with us by the State of Israel for that purpose.

TOTAL LIABILITIES

     Our total liabilities, not including Preference Shares, as of December 31,
2006 decreased to NIS 7,006 million as compared to NIS 8,193 million as of
December 31, 2005 and NIS 8,570 million as of December 31, 2004. The main
component of the net change in the total liabilities was the reduction of our
deposits, which decreased from NIS 8,488 million as of December 31, 2004 to NIS
8,110 million as of December 31, 2005 to NIS 6,923 million as of December 31,
2006 (15% decrease in the last year). The calculation of total liabilities
includes a deposit of the State of Israel that was used to grant a credit
guaranteed by the State of Israel to the Israel Electric Corporation Ltd., the
balance of which amounted to NIS 6,167 million as of December 2004, NIS 6,405
million as of December 31, 2005 and NIS 5,671 million as of December 31, 2006.

AVERAGE BALANCE OF ASSETS IN VARIOUS LINKAGE SEGMENTS AND THE MARGIN ON THESE
ASSETS

     UNLINKED SHEKEL SEGMENT - The average balance of assets in this segment
(not including ALM derivatives) amounted to NIS 364 million compared with NIS
619 million in 2005, a decrease of 41%. The margin in this segment, including
the effect of derivatives, was 1.39% compared with 1.41% in 2005.

                                       50
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     It should be noted that most of the non-income bearing debt is included in
this segment. As at December 31, 2006 the balance of non-income bearing debt in
this segment is NIS 125 million and constitutes 55% of the balance of this
segment (before the supplementary and general allowance).

     CPI-LINKED SHEKEL SEGMENT - In 2006, the average balance of assets in this
segment amounted to NIS 561 million compared with NIS 696 million in 2005, a
decrease of 19.4%. The decline in volume of operations in this segment derives
from both the general decline in the Bank's operations and the policy of the
Bank, according to which the Bank renews credit only for short periods and
mainly in the unlinked shekel segment. The margin in this segment, including the
effect of derivatives, was 2.58% compared with 2.74% in 2005.

     FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT - The total average
volume of assets in this segment (not including ALM derivatives) amounted to NIS
6,406 million in 2006 compared with NIS 6,775 million in 2005. Credit in this
segment includes credit guaranteed by the State that was granted to the Israel
Electric Corporation Ltd. out of a deposit of the State. The margin in respect
of this credit is negligible and matches the level of risk attached to this
credit.The average balance of this credit in 2006 amounted to NIS 6,143 million
compared with NIS 6,354 million in 2005. Excluding the said credit, the average
balance of assets in this segment amounts to NIS 263 million, compared with NIS
421 million in 2005, a decrease of 38%.

     The margin in this segment, including the effect of derivatives, was 0.08%,
compared with 0.02% in 2005. The low margin rate in this segment is the result
of the share of the State guaranteed credit of the entire segment.

     The State guaranteed credit and the State deposit from which the credit was
granted bear a high rate of interest, and due to their large proportion of total
assets and liabilities and the marginal interest margin in this credit, they
distort the data regarding the margin of this segment.

     In respect of the credit of this segment, which is dollar-denominated, an
expense was recorded in 2006 in an amount of NIS 88.7 million (compared with
income of NIS 853.7 million in 2005). The reason for the recordation of an
expense was the decrease in the exchange rate of the U.S. dollar, compared with
an increase in the exchange rate of the dollar in 2005. As aforementioned, the
margin in respect of the State guaranteed credit to Israel Electric Corporation
Ltd. is insignificant, and therefore the income (in 2005, an expense) recorded
in respect of the Government deposit that served as a source for financing the
credit was in the same amount.

     An analysis of the data regarding this segment with the exclusion of the
aforementioned credit and deposit shows a margin of 1.99% in 2006.

     With respect to the profit from financing operations, it can be assumed
that the Bank's policy of reducing its activities and the continuous decrease in
the volume of credit will continue to have an adverse effect on the profit from
financing operations.

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OPERATING INCOME AND EXPENSE

     OPERATING AND OTHER INCOME - This income amounted to NIS 21.5 million in
2006, compared with NIS 18.2 million in 2005 and NIS 50.2 million in 2004. Most
of the income derived from gains from investments in shares which amounted to
NIS 16.4 million in 2006, compared with NIS 11.3 million in 2005 and NIS 41.5
million in 2004. It is worthy of noting that the entire investment in shares
amounted to NIS 56 million as at December 31, 2004, NIS 61 million as at
December 31, 2005, and NIS 50 million at December 31, 2006, so that the gains on
the aforementioned stock portfolio in recent years are considerably high and
there is no certainty that they will continue also in the future.

     In 2006, income from operating commissions amounted to NIS 1.3 million
compared with NIS 2.2 million in 2005 and NIS 4.1 million in 2004, a decrease
reflecting the decline in transactions executed by the customers through the
Bank.

                                       52
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     OPERATING AND OTHER EXPENSES - Amounted to NIS 35.1 million in 2006,
compared with NIS 44.0 million in 2005 and 45.0 million in 2004.

     Payroll expenses, not including employee retirement costs, totaled NIS 17.6
million in 2006, compared with NIS 18.2 million in 2005 and NIS 19.7 million in
2004. The decrease in payroll expenses was affected by the decrease in the
number of employees in accordance with the Run - Off Plan and the efficiency
plan complementing it.

     Due to losses for the purpose of V.A.T. on profit, payroll V.A.T. that is
usually levied on a financial institution was not included in payroll expenses.
Payroll receivable amounted to NIS 2.8 million for 2006, compared with NIS 3.1
million for 2005.

     In 2006, an expense in the total amount of NIS 0.5 million was recorded
under the item of expenses in respect of the early retirement of employees
compared with an amount of NIS 5.5 million in 2005 and as compared to income of
NIS 0.8 million in 2004. Of the expense recorded in 2005, NIS 3.7 million was
due to the legislative expansion of the definition of salary for purposes of
payroll tax that was included as part of the economic policy for 2005.

     Maintenance and depreciation of buildings and equipment totaled NIS 2.7
million in 2006, compared with NIS 3.8 million in 2005 and NIS 5.7 million in
2004.

     Other operating expenses amounted to NIS 14.3 million, compared with NIS
16.5 million in 2005 and NIS 20.4 million in 2004. There was a significant
decrease in the components of this item as part of the efficiency plan that was
implemented by the Bank.

     PROVISION FOR TAXES ON INCOME - We received final tax assessments for the
tax years up to and including 2003. Carry-forward tax losses of the Bank, in
respect of which deferred tax assets have not been recorded, amount to NIS 703
million.

B.   LIQUIDITY AND CAPITAL RESOURCES

SOURCES OF FUNDS

     Our main sources of liquidity at the present time are (a) the special line
of credit extended by the Bank of Israel, (b) Treasury deposits, and (c) any
collections we obtain on existing loans to customers. Set forth below is a chart
showing the percentage of the various segments of deposits, as of December 31,
2006:

      Deposits from the public:                              1%
      Treasury:                                             88%
      Deposits from Bank of Israel:                         11%

     The balance of the special line of credit (principal and interest) as of
December 31, 2006 was NIS 761 million, as compared to NIS 1,034 million as of
December 31, 2005, a decline of NIS 273 million. We used funds made available
primarily from the realization of our assets to repay deposits of the public and
repay the special line of credit

                                       53
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     The balance of the special line of credit (principal and interest) at the
end of each quarter of 2006, was as follows:

     IN MILLIONS OF NIS

     1st Quarter-              941
     2nd Quarter-              927
     3rd Quarter-              822
     4th Quarter-              761

     The terms of the special line of credit require that the loans extended to
us thereunder be repaid, at the latest, by July 31, 2008.

     Under the present terms of the special line of credit, as set forth in the
letter of the Governor of the Bank of Israel dated October 30, 2005, the maximum
amount of the credit line shall not exceed at any time the sum of NIS 1.25
billion and the balance shall decrease according to the forecast that was
attached to the above letter.

     In the opinion of management, subject to the continued availability of the
special line of credit from the Bank of Israel, our capital is sufficient for
our present requirements under the Run-Off Plan.

     For a more detailed description of the restrictions imposed by the special
line of credit, see "Item 4. Information on the Company-Business
Overview-Adoption of Run-Off Plan and Amendment of the Special Line of Credit"
above.

     Deposits of the public amounted to NIS 67 million on December 31, 2006,
compared with NIS 178 million on December 31, 2005, a decrease of 62%. These
deposits are comprised of non-linked shekel deposits in the amount of NIS 31
million, compared with NIS 88 million at December 31, 2005, CPI-linked deposits
in the amount of NIS 33 million, compared with NIS 78 million at December 31,
2005, and foreign currency denominated or linked deposits in the amount of NIS 3
million, compared with NIS 12 million at December 31, 2005.

     Government deposits as of December 31, 2006 amounted to NIS 6,087 million,
compared with NIS 6,883 million on December 31, 2005. The main component of the
Government deposits is foreign currency denominated deposits, which serve as the
source for granting long-term loans. The balance of the Government's foreign
currency deposits amounted to NIS 5,781 million on December 31, 2006, compared
with NIS 6,527 million at the end of 2005. The decrease in the foreign currency
Government deposits is due to the decrease in the exchange rate of the dollar.
The Government's foreign currency deposits include a deposit of NIS 5,671
million that was made in order to provide long-term credit to the Israel
Electric Corporation Ltd. The terms of the credit and deposit are the same
except for an insignificant margin that we have with respect to the credit. As
aforementioned, we also received a guarantee from the State as security for the
said credit.

                                       54
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     Another component of these deposits are the CPI-linked deposits, received
as part of the arrangement of the Kibbutzim. These deposits served as a source
for rescheduling the debts of the kibbutzim. The balance of the Government's
CPI-linked deposits as of December 31, 2006 amounted to NIS 306 million,
compared with NIS 356 million as of December 31, 2005. These deposits are
long-term deposits that are repaid in installments according to the period for
which the arrangement loans were provided (until the end of 2013).

     Deposits from banks as of December 31, 2006 amounted to NIS 768 million,
compared with NIS 1,049 million at December 31, 2005. Of this amount, an amount
of NIS 761 million derived from the special line of credit, which the Bank of
Israel granted to the Bank, compared with NIS 1,034 million as of December 31,
2005. These figures indicate a decrease of NIS 273 million in the utilized line
of credit. Other than the Bank of Israel line of credit, the aforementioned item
also includes a deposit in the amount of NIS 7 million that is a long-term
deposit of a foreign bank that was deposited with the Bank in 1997. This deposit
was deposited by the Bank with the Treasury and has the same repayment dates as
the aforementioned deposit.

CASH FLOW

     Our cash flow must be examined in light of the process by which we are
realizing the assets of the bank within the framework of the Run-Off Plan under
which we are operating.

     The cash balance as of December 31, 2006 amounted to approximately NIS 53
million, as was the amount as of December 31, 2005.

     CASH AND DEPOSITS WITH BANKS. The balance of our deposits with banks
amounted to approximately NIS 66.4 million, as of December 31, 2006, compared
with approximately NIS 72.9 million as of December 31, 2005 and NIS 117.9 as of
December 31, 2004.

     The balance of our deposits with banks as of December 31, 2006 was
comprised as follows:

     o    NIS 8.1 million deposits with the Bank of Israel.

     o    NIS 58.3 million short-term deposits with other banks in Israel and
          abroad. (This amount includes NIS 22.0 million, as of December 31,
          2006, that are pledged to the banks in which they are deposited. These
          pledges were granted pursuant to the approval of the Bank of Israel
          and serve as collateral for our activities in derivative financial
          instruments with these banks.)

     o    This amount includes NIS 10.2 million long-term CPI-linked deposits.

     Cash flow from current operations in 2006 showed a deficit of NIS 6.5
million.

     Cash flow from asset operations in 2006 shows a decline in the assets in an
amount equal to approximately NIS 1,192 million, resulting primarily from a
decline in loans, which was approximately NIS 1,140 million.

                                       55
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     Cash flow from liabilities in 2005 showed a decline of approximately NIS
1,186 million in our liabilities, including deposits of the public, deposits of
banks and deposits of the Government. The special line of credit from the Bank
of Israel currently represents the cash flow surplus between the cash flow
resulting from realization of the assets and the cash flow resulting from the
payment of liabilities. The balance of the special line of credit at the end of
2006 was NIS 273 million less than at the end of 2005, which indicates that,
during the course of 2006, the consideration from the realization of the assets
(including the decline of cash), despite the deficit in the cash flow from
current operations, constituted a sufficient source for the payment of the
liabilities and the significant reduction of the outstanding balance of the
special line of credit.

     The changes in the makeup of our asset and liability portfolio should be
viewed in light of the Run-Off Plan that we are currently implementing. The
Run-Off Plan includes the cessation of our granting of new credits, the gradual
realization of our assets and the repayment of deposits to our depositors. We
are presently unable to raise new capital or new deposits and the special line
of credit was extended to us to enable us to meet our obligations.

EQUITY CAPITAL

     Our shareholders' equity as of December 31, 2006 was equal to NIS 20
million as compared with NIS 197 million as of December 31, 2005. The total
equity, including C Shares, CC Shares, CC1 Shares, D Shares and DD Shares
(collectively, the "Preferred Shares"), as of December 31, 2006 amounts to
approximately NIS 511 million (compared with NIS 527 million as of December 31,
2005) representing approximately 6.8% of the balance sheet total.

     In August 2005 the Israel Accounting Standards Board published Accounting
Standard No. 22, "Financial Instruments: Disclosure and Presentation." The
standard provides rules for presenting financial instruments in the financial
statements and specifies the proper disclosure required in respect thereto.
Furthermore, the standard provides the method for classifying financial
instruments as financial liabilities and as shareholders' equity, for
classifying the interest, dividends, losses and gains related to them and the
circumstances for offsetting financial assets and financial liabilities. The new
standard is to apply to financial statements for periods beginning on January 1,
2006 or thereafter.

     The standard provides that it is to be adopted on a prospective basis. The
comparative data presented in the financial statements for periods beginning on
the date the standard comes into effect will not be restated.

     Prior to implementing the standard, C Shares, CC Shares and CC1 Shares were
classified as part of our shareholders' equity. As part of the implementation of
Standard No. 22 as of January 1, 2006, the shares were reclassified to
liabilities in respect of profit-participating preference shares (see the
Statement of Changes in Shareholders' Equity and Note 1.D of our financial
statements). Following this reclassification, our shareholders' equity decreased
as of January 1, 2006 by an amount of NIS 204.1 million and became a
shareholders' deficit in the amount of NIS 7.0 million. This accounting change
has no impact on the surplus of assets distributable to shareholders upon
liquidation, on the preference order for the distribution of the balance of our
assets upon liquidation or on the related rights of each class of shares. For
details of these rights, see Notes 14, 15, and 16 to our financial statements.

                                       56
```

```

CAPITAL ADEQUACY

     On December 31, 2006, our minimum capital ratio was 1.34%, compared with a
negative ratio (0.74%) on December 31, 2005. The Proper Banking Procedures
stipulate that the minimum capital ratio must be 9.0%.

     As a result of the sharp decline in our "first tier capital" and in view of
the limitation providing that "second tier capital" in excess of the "first tier
capital" shall not be taken into consideration in calculating the minimum
capital ratio, almost all of our "second tier capital" remains unutilized in the
calculation of the minimum capital ratio (thus, as at December 31, 2006, "second
tier capital" in the total amount of NIS 518 million remains unutilized). In the
opinion of our Board of Directors, in our present circumstances, the requirement
to maintain a minimum capital ratio is irrelevant to our operations. It should
be noted that the regulatory mandated minimum capital ratio is applied to
normally operating institutions, while our Bank is currently subject to severe
limitations pursuant to the Run-Off Plan.

ALLOWANCE FOR DOUBTFUL DEBTS

     The following table shows a summary of the changes in the allowance for
doubtful debts for the years ended December 31, 2006, 2005 and 2004:

                                                                      2006
                                                        --------------------------------
                                                        SPECIFIC  SUPPLEMENTARY
                                                     ALLOWANCE (1) ALLOWANCE (2)  TOTAL
                                                        -------      -------     -------
                                                                REPORTED AMOUNTS
                                                        --------------------------------
                                                                  NIS MILLIONS
                                                        --------------------------------

Balance of allowance at beginning of year                 675.6         57.6       733.2
                                                        -------      -------     -------
Current allowances                                         40.8            -        40.8
Reduction in allowances                                   (12.0)        (5.9)      (17.9)
                                                        -------      -------     -------
Collection of debts written-off in previous years          (1.2)           -        (1.2)
                                                        -------      -------     -------
Amount charged to the income statement                     27.6         (5.9)       21.7
                                                        -------      -------     -------

Debts written-off                                         (46.1)           -       (46.1)
Balance of allowance at end of year                       658.3         51.7       710.0
                                                        =======      =======     =======
Amount of allowance not deducted from credit
 to public                                                  1.9            -         1.9
                                                        -------      -------     -------

                                       57
```

```

                                                                          2005
                                                          ------------------------------------
                                                         SPECIFIC     SUPPLEMENTARY
                                                        ALLOWANCE (1)  ALLOWANCE (2)    TOTAL
                                                          -------        -------       -------
                                                                    REPORTED AMOUNTS
                                                          ------------------------------------
                                                                      NIS MILLIONS
                                                          ------------------------------------

Balance of allowance at beginning of year                   714.4           69.6         784.0
                                                          -------        -------       -------

Current allowances                                           82.9              -          82.9
Reduction in allowances                                     (26.4)         (12.0)        (38.4)
Collection of debts written-off in previous years            (0.3)             -          (0.3)
                                                          -------        -------       -------
Amount charged to the income statement                       56.2          (12.0)         44.2
                                                          -------        -------       -------

Debts written-off                                           (95.3)             -         (95.3)
                                                          -------        -------       -------

Balance of allowance at end of year                         675.6           57.6         733.2
                                                          =======        =======       =======

Amount of allowance not deducted from credit
 to public                                                    1.0              -           1.0
                                                          -------        -------       -------

                                                                          2004
                                                          ------------------------------------
                                                         SPECIFIC     SUPPLEMENTARY
                                                       ALLOWANCE (1)  ALLOWANCE (2)     TOTAL
                                                          -------        -------       -------
                                                                    REPORTED AMOUNTS
                                                          ------------------------------------
                                                                      NIS MILLIONS
                                                          ------------------------------------

Balance of allowance at beginning of year                   732.5           78.5         811.0
                                                          -------        -------       -------
Current allowances                                           96.5            3.4          99.9
Reduction in allowances                                     (16.5)         (12.3)        (28.8)
Collection of debts written-off in previous years            (0.9)             -          (0.9)
                                                          -------        -------       -------
Amount charged to the income statement                       79.1           (8.9)         70.2
                                                          -------        -------       -------

Debts written-off                                           (98.1)             -         (98.1)
                                                          -------        -------       -------

Balance of allowance at end of year                         714.4           69.6         784.0
                                                          =======        =======       =======
Amount of allowance not deducted from credit
 to public                                                    0.9            0.9           1.8
                                                          -------        -------       -------

(1)  Not including allowance for interest on non-income bearing loans.

(2)  Including a general allowance in accordance with Bank of Israel directives
     in the total amount of NIS 38.9 million (as of December 31, 2005 - NIS 38.9
     million; as of December 31, 2004 - NIS 38.9 million).

                                       58
```

```

     The following table summarizes the balance of overall credit risk of
problem loans in 2006, 2005 and 2004 and the allowance for doubtful debts
relating to them:

                                                                         AS OF DECEMBER 31
                                                                ----------------------------------
                                                                        IN MILLIONS OF NIS
                                                                ----------------------------------
                                                                2006           2005           2004
                                                                ----           ----           ----

Overall Credit Risk of Problem Loans                            583.2          799.1        1,126.1
Annual Expense for Allowance for Doubtful Debts                  21.7           44.2           70.2
Percentage of Annual Expense for Allowances for
Doubtful Debts out of Overall Credit of Problem Loans             3.7%           5.5%           6.2%

C.   OFF-BALANCE SHEET ARRANGEMENTS (GUARANTEE ARRANGEMENTS AND OTHER
     COMMITMENTS)

     In the normal course of our business, prior to the liquidity crisis we
experienced in the third quarter of 2002, we engaged in several types of
off-balance sheet arrangements to meet the financing needs of our customers,
including various types of guarantees, commitments to extend credit and letters
of credit. The following table summarizes the balances of these arrangements as
of December 31, 2006 and 2005:

                                          DECEMBER 31   DECEMBER 31
                                              ----         ----
                                              2006         2005
                                              ----         ----
                                              IN MILLIONS OF NIS
                                              -----------------

TRANSACTIONS THE BALANCE OF WHICH
 REPRESENTS A CREDIT RISK -

Guarantees securing credit                    170.9       171.6
Guarantees to home purchasers                  46.2        49.8
Other guarantees and liabilities                6.3        17.4
Unutilized revolving credit facilities          0.6         1.7

     Our income and expenses from the above types of off-balance sheet financial
instruments for the past two years were as follows:

                                               IN MILLIONS OF NIS
                                              -------------------
                                              2006           2005
                                              ----           ----

Income from guarantees issued
by us                                         1.4            2.3

Expenses on guarantees issued
in our favor                                    -              -

                                       59
```

```

     Our off-balance sheet arrangements involve credit risk, as detailed in the
table above, according to each type of arrangement.

     The realization of our undertakings pursuant to our off-balance sheet
arrangements will have an adverse effect on our liquidity.

     The circumstances under which we would have to pay pursuant to our
off-balance sheet arrangements are generally external circumstances, dependent
upon third parties. While, generally speaking, it is not certain whether or not
such circumstances will take place, it can be assumed with a high degree of
certainty that we will pay part of the above off-balance sheet arrangements.

OTHER CONTINGENT LIABILITIES AND COMMITMENTS

     In 2003, we signed a lease agreement in respect of our office premises for
an initial period ending in August 2006. On March 21, 2006, we exercised our
option to extend the lease period until August 31, 2009. The annual lease
payment, which is linked to the CPI, amounts to NIS 1.0 million. The annual
lease payment, which is linked to the CPI, will be raised by 5% in the
additional period.

     We have outsourced our computer services. In connection with the
outsourcing, in 2004 we entered into an agreement with a three-year term, with
an optional two year extension. In 2006, the cost of the service amounted to NIS
2.4 million. On May 7, 2006, we exercised the extension option. The cost of
service for each additional year will amount to NIS 2.3 million.

     Between 1998-2001, we entered into agreements to participate in private
investment funds. The total amount approved for investment by us amounts to
US$20 million. The investment funds invest in Israeli companies or companies
related to Israel. The majority of the investments made by these funds is in the
credit component. The balance of this undertaking as of balance sheet date
amounts to US$ 1.5 million.

     We have granted to our officers, directors and others, various
indemnification agreements. For a description of certain indemnification
agreements granted to our directors and senior officers, see "Item 6. Directors,
Senior Management and Employees." For a description of certain indemnification
agreements granted to employees and others, see Note 21 to our financial
statements in Item 17.

                                       60
```

```

DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY PERIODS

A.   VOLUME OF OPERATIONS

1.   Stated amount of derivative instruments ALM (1)

                           DECEMBER 31, 2006         DECEMBER 31, 2005
                          --------------------      --------------------
                         CPI/SHEKEL    FOREIGN    CPI/SHEKEL     FOREIGN
                         INTEREST     CURRENCY     INTEREST     CURRENCY
                         CONTRACTS    CONTRACTS    CONTRACTS    CONTRACTS
                          -------      -------      -------      -------
                            REPORTED AMOUNTS          REPORTED AMOUNTS
                          --------------------      --------------------
                       NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
                          -------      -------      -------      -------

Options purchased               -            -            -         14.5
Forward contracts            45.9         53.4         45.8        136.7
                          -------      -------      -------      -------

Total                        45.9         53.4         45.8        151.2
                          =======      =======      =======      =======

2.   Gross fair value of derivative instruments ALM (1)

                                   DECEMBER 31, 2006        DECEMBER 31, 2005
                                  -------------------     --------------------
                                 CPI/SHEKEL   FOREIGN    CPI/SHEKEL   FOREIGN
                                 INTEREST    CURRENCY     INTEREST     CURRENCY
                                 CONTRACTS   CONTRACTS   CONTRACTS    CONTRACTS
                                  -------     -------     -------      -------
                                    REPORTED AMOUNTS        REPORTED AMOUNTS
                                  -------------------     --------------------
                               NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
                                  -------     -------     -------      -------

Gross positive fair value             1.0         1.1           -          3.5
Gross negative fair value               -           -        (0.5)           -
                                  -------     -------     -------      -------

Total                                 1.0         1.1        (0.5)         3.5
                                  =======     =======     =======      =======

B.   DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO THE
     CONTRACT

                                                                      DECEMBER 31, 2006
                                                               ------------------------------
                                                                       REPORTED AMOUNTS
                                                               ------------------------------
                                                                         NIS MILLIONS
                                                               ------------------------------
                                                                BANKS   CENTRAL BANKS  TOTAL
                                                               -------      -------   -------

Gross positive fair value of derivative instruments                2.1            -       2.1
Off-balance sheet credit risk in
 respect of derivative instruments (2)                             9.9            -       9.9
                                                               -------      -------   -------

Total credit risk in respect of derivative instruments            12.0            -      12.0
                                                               =======      =======   =======

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```

```

                                                       DECEMBER 31, 2005
                                               --------------------------------
                                                       REPORTED AMOUNTS
                                               --------------------------------
                                                         NIS MILLIONS
                                               --------------------------------
                                                BANKS    CENTRAL BANKS   TOTAL
                                               -------      -------     -------

Gross positive fair value
 of derivative instruments                         3.5            -         3.5
Off-balance sheet credit risk in
 respect of derivative instruments (2)            18.2          1.4        19.6
                                               -------      -------     -------

Total credit risk in respect of
 derivative instruments                           21.7          1.4        23.1
                                               =======      =======     =======

(1)  Derivatives comprising part of the asset and liability management of the
     Bank, not designated for hedging purposes.

(2)  Off-balance sheet credit risk relating to derivative instruments (including
     those with a negative fair value) as computed for limitation on individual
     borrower indebtedness.

C.   MATURITY PERIOD - STATED AMOUNTS AT YEAR-END

                                             DECEMBER 31, 2006
                                      ---------------------------------
                                              REPORTED AMOUNTS
                                      ---------------------------------
                                      UP TO     FROM 3 MONTHS
                                     3 MONTHS     TO 1 YEAR      TOTAL
                                      -------      -------      -------
                                   NIS MILLIONS  NIS MILLIONS NIS MILLIONS
                                      -------      -------      -------

CPI/Shekel interest contracts            20.5         25.4         45.9
Foreign currency contracts               53.4            -         53.4
                                      -------      -------      -------

Total                                    73.9         25.4         99.3
                                      =======      =======      =======

                                       62
```

```

                                              DECEMBER 31, 2005
                                      ----------------------------------
                                               REPORTED AMOUNTS
                                      ----------------------------------
                                      UP TO      FROM 3 MONTHS
                                     3 MONTHS      TO 1 YEAR      TOTAL
                                      -------       -------      -------
                                   NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                      -------       -------      -------

CPI/Shekel interest contracts            25.3          20.5         45.8
Foreign currency contracts              151.2             -        151.2
                                      -------       -------      -------

Total                                   176.5          20.5        197.0
                                      =======       =======      =======

     Since we currently enter into these transactions in derivative financial
instruments with other banks that have high credit ratings, the credit risk
involved in these transactions is relatively small.

     We enter into derivative financial instruments transactions in order to
limit our market risk exposure, as further detailed in "Item 11. Quantitative
and Qualitative Disclosures about Market Risk."

ALLOWANCE FOR DOUBTFUL DEBTS RELATING TO OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

     Our allowance for doubtful debts relating to off-balance sheet financial
instruments was NIS 1.9 million in 2006 compared with NIS 1.0 million for 2005
and 1.8 for 2004.

MATURITY PROFILE OF OUR CONTRACTUAL OBLIGATIONS

     The following table sets forth as of December 31, 2006 the maturity profile
of our contractual obligations.

                                                                 AS OF DECEMBER 31, 2006
                                                                  PAYMENTS DUE BY PERIOD
                                                                    IN MILLIONS OF NIS
                                     ---------------------------------------------------------------------------------------
                                                                                                                    WITHOUT
                                                      LESS THAN                       4-5            OVER           MATURITY
                                      TOTAL            1 YEAR      1-3 YEARS         YEARS          5 YEARS           DATE
                                     --------         --------      --------        --------        --------        --------

CONTRACTUAL CASH OBLIGATIONS

Senior Debt                             799.4            133.4         114.0               -               -          *552.0

Subordinated Debt                    10,140.5            771.0       1,313.6         1,290.7         6,707.0            58.2
                                     --------         --------      --------        --------        --------        --------
Total Contractual Cash
Obligations**                        10,939.9            904.4       1,427.6         1,290.7         6,707.0           610.2
                                     ========         ========      ========        ========        ========        ========

CONTINGENT LIABILITIES AND
COMMITMENTS

Lease Agreement                           2.7              1.0           1.7               -               -               -

IT Outsource Contract                     4.6              2.3           2.3               -               -               -

Stated Amount of Derivative
Instruments                              99.3             99.3             -               -               -               -
                                     --------         --------      --------        --------        --------        --------

Total Contingent Liabilities
and Commitments                         106.6            102.6           4.0               -               -               -
                                     ========         ========      ========        ========        ========        ========

*    The balance includes the balance of the credit line that was provided by
     the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).

**   Not including Preferred Shares (see Note 1.D to our financial statements in
     Item 17).

                                       63
```

```

     In the above table, the future cash flows are presented in respect of the
liabilities in accordance with the remaining period to the contractual maturity
date of each cash flow.

     Out of the total contractual cash obligations set forth in the table above,
NIS 9,438.9 million (included in subordinated debt) stems from the repayment of
the State of Israel's deposit which served for the granting of a credit
guaranteed by the State of Israel. The maturity profile of the payments due with
respect to the deposit is as follows:

         Less than one year         NIS 608.3 million

         1-3 years                  NIS 1,194.2 million

         4-5 years                  NIS 1,177.6 million

         More than 5 years          NIS 6,463.8 million

ACCOUNTING POLICY IN RESPECT OF CRITICAL ISSUES

     Note 1 to our financial statements describes the principal accounting
policies according to which our financial statements are prepared. The
implementation of these accounting principles by our Board of Directors and
management in the preparation of our financial statements requires the use of
various assessments and estimates that affect the reported amounts of assets and
liabilities (including contingent liabilities) and our financial results. Actual
results may differ from the assessments and estimates applied.

                                       64
```

```

     Accounting policy as to critical issues relates to issues that are
significant to the reporting of our financial position, are difficult and
subjective and may require complex assessments due to the necessity to perform
estimates of effects, which are mostly uncertain.

     A portion of the assessments and estimates that we use involve, to a large
extent, uncertainty or dependency on various variables. Assessments and
estimates of this type may have a material effect on the financial results
presented in the financial statements.

     With respect to each of the critical issues discussed herein, our
management relies on the best information at hand. Our directors and management
believe that the assessments and estimates that we use were fairly applied in
the preparation of our financial statements.

     THESE ACCOUNTING PRINCIPLES IN RESPECT OF CRITICAL ISSUES ARE IMPLEMENTED
BY OUR BOARD OF DIRECTORS AND MANAGEMENT ACCORDING TO ISRAELI GAAP, WHICH
DIFFERS IN CERTAIN RESPECTS FROM U.S. GAAP AS DESCRIBED BELOW IN "ITEM 17.
FINANCIAL STATEMENTS" AND NOTE 32 TO THE FINANCIAL STATEMENTS.

     The following list sets forth the issues defined by our Board of Directors
and management as critical from the accounting perspective.

     ALLOWANCES FOR DOUBTFUL DEBTS - The specific allowance for doubtful debts
is prepared based on the assessment of our directors and management as to the
losses inherent in our credit portfolio, including off-balance sheet items. In
making these assessments management takes into consideration, among other
things, the risks involved in the financial stability of our borrowers and their
repayment ability, based on the information compiled and presented by our credit
officers as to their financial position and future cash flows as well as the
quality and value of the collateral received.

     The financial stability of our borrowers and their ability to repay depends
on economic variables that are not under our control and/or the control of the
borrowers.

     Our directors and management are assisted by independent assessors and
appraisers in order to obtain an indication as to the value of the collateral
that we hold. For example, the assessment of real estate that serves as
collateral for a loan that we extend is generally made for us by independent
assessors. The value taken for the purpose of computing the required allowance
for doubtful debts is based upon an appraiser's valuation concerning "hasty
sale," taking into account the terms and conditions of the sale and the expenses
incurred with the sale.

     The amount that may be collected from borrowers is therefore based on
assessments that by nature are subjective. The dependency on these assessments
cannot assure that the amount that would in fact be collected will be in
accordance with the assessments.

     The total monetary debt (not including off-balance sheet items) of
borrowers in respect of whom an allowance for doubtful debts exists as of
December 31, 2006 was NIS 362 million (on December 31, 2005 - NIS 445 million).

                                       65
```

```

     The amount of credit to the public stated in the financial statements is
net of the general and supplemental allowances for doubtful debts, the total
balance of which as of December 31, 2006 amounted to NIS 51.7 million (on
December 31, 2005 - NIS 57.6 million). The allowances that we made are done in
accordance with directives of the Bank of Israel.

     Our management classifies problematic debts according to classes and
criteria determined by Proper Banking Procedures. Classification of our debts
could sometimes be subjective (such as the differentiation between a debt
temporarily in arrears and a debt in arrears and the classification of a debt as
under special supervision). Changes in our estimates may have a significant
effect on our financial statements. Our directors and management examine the
allowances for doubtful debts and the classification of the borrowers on a
quarterly basis and update them where necessary.

     The supplemental allowance is based on risk characteristics determined by
the Bank of Israel. However, the Bank of Israel has exempted us from the
requirement to record a supplemental allowance in respect of deviations from the
limits on the indebtedness of a single borrower and of a borrower group, in
respect of deviations from limits on credit for the purpose of acquiring means
of control in corporate entities and in respect of deviation from limits on the
concentration of indebtedness by economic sectors. Following this, a
supplemental allowance was made only in respect of deviations relating to the
lack of updated financial statements and in respect of balance of credit to
borrowers classified as problematic borrowers.

FAIR VALUE OF SECURITIES - All the securities owned by us as of December 31,
2006 are classified as available-for-sale securities. Marketable securities are
stated in the balance sheet at fair value. Their fair value is determined on the
basis of market quotation as of the balance sheet date. This data does not
necessarily reflect the price that may be received from the sale of securities
in large quantities. The value of non-marketable securities in the financial
statements at December 31, 2006, was NIS 17 million (as of December 31, 2005 -
NIS 30 million). These securities are stated at their adjusted cost net of
provisions for impairment in value based on management's assessments. These
provisions were included based on the financial statements of the companies
involved. Actual proceeds from the disposal of these investments may differ from
their carrying value as stated in the financial statements.

CONTINGENT LIABILITIES - Various legal actions are pending against us (including
a motion for approval of a class action and an appeal on the denial of a motion
for approval of a derivative action). All of these actions are handled by our
independent counsels. The independent counsels have informed us of their
evaluation as to the probability of success of these actions. Where the
evaluation is that the probability of success is not probable (but either remote
or reasonably possible), we have not necessarily made provisions in respect of
the risk involved. See "Item 8. Legal Proceedings" below.

     We make provisions with respect to those actions where, according to our
counsels' opinion it is probable to assume that they will not be cancelled or
dismissed. Our counsels submit their opinion in each quarter and management
updates the provisions where required. The provisions that we make are based on
the evaluations of our counsels. There is no certainty that the final results of
the legal actions will be the same as what our counsels suggest.

                                       66
```

```

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

IDENTITY OF DIRECTORS

     The name, age and position of each member of our Board of Directors as of
June 1, 2007, and the month and/or year his or her tenure began, are set forth
in the following table:

NAME                                    AGE        POSITION WITH REGISTRANT                                        HOLDS POSITION SINCE
----                                    ---        ------------------------                                        --------------------

Dr. Raanan Cohen(1,3,4,12)               65        Chairman of the Board of Directors of the Bank                  August 2002
Richard Armonn(1,4,5)                    72        Deputy Chairman of the Board of Directors of the Bank           1971(6)
Avi Olshansky(1,4,8)                     70        Director                                                        November 1997
Yacob Aizner(2,4,8)                      60        Director                                                        October 2002
Shulamit Eshbol(2,3,9)                   41        Director                                                        November 2002
Yeheskel Beinisch(2,3,9)                 65        Director                                                        November 2002
Moshe Gavish(1,3,9)                      58        Director                                                        November 2002
Ehud Green (2,3,4,10)                    52        Director                                                        December 2002
Ben-Zion Dagan(3,4,7)                    73        Director                                                        July 2002
Aharon Hildesheimer(1,2,11)              64        Director                                                        March 2006

----------

(1)  Member of the Administration Committee.

(2)  Member of the Audit Committee.

(3)  Member of Financial Statement Review Committee.

(4)  Member of Credit Committee.

(5)  Appointee of Bank Hapoalim B.M. and its affiliates.

(6)  Director since 1971 with interruptions.

(7)  Appointee of Israel Discount Bank Ltd. and its affiliates.

(8)  Appointee of Bank Leumi le-Israel B.M. and its affiliates.

(9)  Appointee of State of Israel.

(10) Outside director re-elected by our shareholders at the annual general
     meeting of the shareholders on March 22, 2006 in accordance with the
     Companies Law. Did not serve as a director from December 25, 2005 until
     March 21, 2006.

(11) Outside director elected by our shareholders at the annual general meeting
     of the shareholders on March 22, 2006 in accordance with the Companies Law.

(12) Dr. Raanan Cohen is not a director appointed by the holders of our Ordinary
     A Shares. He was appointed to the Board of Directors by the other members
     of the Board of Directors. Under our Articles of Association, a director so
     appointed by the other directors automatically becomes Chairman of the
     Board.

                                       67
```

```

     DR. RAANAN COHEN, DIRECTOR AND CHAIRMAN OF THE BOARD. Dr. Cohen has been a
director since August 2002 and he currently serves as our Chairman of the Board.
He was appointed to the Board of Directors by the other directors. He is
Chairman of our Administration Committee and Financial Statement Review
Committee and a member of our Credit Committee. Dr. Cohen was a member of
Knesset (the Israeli parliament) from 1988 until 2002. Dr. Cohen served as the
Secretary General of the Israeli Labor Party from 1997 until 2002. From 2000
until 2002, he served as a Minister in the Government. From 1992 until 1999, he
served as a public director of Transclal Trade Ltd., Williger Ltd. and Blue
Square Cooperative. Dr. Cohen has served as a director of Oil Refineries Ltd.
and is currently a director of Phoenix (Israel) Insurance Ltd., Transclal Trade
Ltd. and Zerah Oil and Gas Exploration Ltd.

     RICHARD ARMONN, DIRECTOR. Mr. Armonn has been a director since 1971, with
interruptions. He is an appointee of Bank Hapoalim B.M. and its affiliates and
he currently serves as our Deputy Chairman. He is Chairman of our Credit
Committee and a member of our Administration Committee. Mr. Armonn served in the
past as Deputy Chief Executive Officer of Bank Hapoalim B.M. and he was also the
manager of the credit department for that bank. He has served as Chairman of the
Board of Gmul Investments Ltd. He is the Honorary Chairman of the Israel-Romania
Chamber of Commerce and Industry. He is also a director of Elhana Ltd.

     AVI OLSHANSKY, DIRECTOR. Mr. Olshansky has been a director since November
1997. He is an appointee of Bank Leumi-le-Israel B.M. and its affiliates. Mr.
Olshansky is a member of our Administration Committee and Credit Committee.
Since 1997, he has worked as a financial and economic adviser and since 2003, as
Chairman of A.Olshansky Consulting Ltd. From 1978 to 1991, Mr. Olshansky also
served in various positions at Bank Hapoalim B.M., including as Vice President,
Deputy Managing Director, Senior Executive Vice-President and joint Managing
Director. From 1991 to 1997, he served as Chairman of the Board of Clal (Israel)
Ltd., that operated companies in the insurance, industry, commerce and
construction fields. Until June 2006, Mr. Olshansky served as a director of
Azorim Investment Development and Construction Company Ltd. Mr. Olshansky is a
director of the following companies: Camel Grinding Wheels Sarid Ltd., Kibbutz
Sarid, Kibbutz-Tzora, Tzora Active System Ltd., Asif Provident Funds Management
Company Ltd. and is a member of the Investment Committee of the Harel Provident
Funds.

     YACOB AIZNER, DIRECTOR. Mr. Aizner has been a director since October 2002.
He is an appointee of Bank Leumi le-Israel B.M. and its affiliates. Mr. Aizner
is a member of our Audit Committee and Credit Committee. Mr. Aizner was the
Managing Director (from 1996-1999) and Deputy Managing Director (from 1986-1996)
of Bank of Jerusalem Ltd. Since 2000, Mr. Aizner has worked as an independent
real estate promoter. Mr. Aizner is also a director of Sadot Binyamina Ltd. and
serves as the head of the Investment Committee of the Teachers' Education Fund.

     SHULAMIT ESHBOL, DIRECTOR. Ms. Eshbol has been a director since November
2002. She is an appointee of the State of Israel. Ms. Eshbol is a member of our
Audit Committee and Financial Statement Review Committee. Ms. Eshbol worked in
public accounting as a sole practitioner from 1994-1998. She has also practiced
law at the firm of Eshbol & Yakuel since 2000. As part of her legal practice,
she is engaged in commercial and financial fields. She has served as a director
in Zim Lines Ltd. and the Zichron Yaacov Economic Development Company.

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     YEHESKEL BEINISCH, DIRECTOR. Mr. Beinisch has been a director since
November 2002. He is an appointee of the State of Israel. He is Chairman of our
Audit Committee and a member of our Financial Statement Review Committee. Mr.
Beinisch has practiced law since 1967 and currently heads his own firm, Y.
Beinisch-Law office. Mr. Beinisch was a director of Card Guard AG (Switzerland)
until April 2004.

     MOSHE GAVISH, DIRECTOR. Mr. Gavish has been a director since November 2002.
He is an appointee of the State of Israel. Mr. Gavish is a member of our
Administration Committee and Financial Statement Review Committee. From 1989 to
1993, he served as Commissioner of the Income Tax and Property Tax Authority and
from 1994 to 2000, as General Manager of Mercantile Discount Bank. Since 2000,
he has practiced law and advised companies independently. Mr. Gavish is a
director of the following companies: Israel Electric Corporation Ltd., Afikim
Hashkaot G.G. (2000) Ltd., Innoventions and Allium.

     EHUD GREEN, DIRECTOR. Mr. Green has been a director since December 2002. He
is a member of our Audit Committee, Credit Committee and Financial Statement
Committee. Mr. Green is an outside director. From 1972 to 1996, Mr. Green served
as a career officer in the Israel Defense Forces, the Israel Police and the
security services. Mr. Green has been practicing law in his own firm since 1996.

     BEN-ZION DAGAN, DIRECTOR. Mr. Dagan has been a director since July 2002. He
is an appointee of Israel Discount Bank Ltd. and its affiliates. He is a member
of our Audit Committee and Financial Statement Review Committee. Mr. Dagan
served as a director of a subsidiary of Bank of Jerusalem Ltd. from 1997 to
2002.

     AHARON HILDESHEIMER, DIRECTOR. Mr. Hildesheimer has been a director since
March 2006. He is a member of our Audit Committee and Administration Committee.
Mr. Hildesheimer is an outside director. Since 1991, Mr. Hildesheimer is the
Managing Director of Admon Trust & Investments Ltd. From 1973 to 1987, he served
in various senior positions at Mizrahi Bank Ltd. From 1987 to 1991, Mr.
Hildesheimer served as Managing Director of Finance and Trade Bank Ltd. From
1994 to 2002, he was the founder, director and CFO of Inflight Financial
Services, Ltd., Dublin, Ireland. Mr. Hildesheimer is a director of Pardes
Industries Ltd.

     EPHRAT BRONFELD, DIRECTOR. Ms. Bronfeld was an outside director from
December 2002 until December 2005. She was a member of our Audit Committee,
Financial Statement Review Committee and Administration Committee. From
1996-2002, Ms. Bronfeld worked at Tahal Consulting Engineers Ltd., for two years
as Assistant to the General Manager and Corporate Secretary and for four years
as the General Manager of one of Tahal Consulting Engineers Ltd.'s subsidiaries.
Ms. Bronfeld is a director of Yahav Massad Mutual Funds Ltd., Arel
Communications and Software Ltd and Okiana Advanced Industries Ltd.

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```

     For further information regarding the directors having accounting and
financial expertise, as defined in the Companies Law, see below in this Item 6.

IDENTITY OF OFFICERS

     The name, age and position of each of our executive officers, as of June 1,
2007, and the month and year his or her tenure began, are set forth in the
following table:

NAME                     AGE     POSITION WITH REGISTRANT                HELD POSITION SINCE
----                     ---     ------------------------                -------------------

Dr. Raanan Cohen(1)      66      Chairman of the Board                   August 2002

Uri Galili(2)            62      General Manager                         July 2002

Arieh Savir(3)           61      Deputy General Manager                  September 2002

Rimon Shmaya(4)          58      Comptroller                             April 2001
                                 Comptroller & Financial Risks Manager   January 1998
                                 Member of the Management                May 1996

Nathan Dekel(5)          56      Operations & Controls Manager           April 2004
                                 Operations Manager                      July 1999
                                 Member of the Management                August 1990

Michael Warzager(6)      52      General Counsel                         March 1998

Itzhak David(7)          52      Internal Auditor                        November 2002

     (1) Dr. Raanan Cohen is included in this list since he is a salaried
employee of the bank. Under Israeli law, a director, including a salaried
chairman of the board, is not considered to be an executive officer.

     (2) Mr. Uri Galili has served as our General Manager since July 2002. From
1995 until 2001, Mr. Galili was Director and General Manager of Bank Leumi (UK)
plc From 2001 until July 2002, he served as Head of International Private
Banking at Bank Leumi le-Israel B.M.

     (3) Mr. Arieh Savir has served as our Credit Manager since September 2002
and as our Deputy General Manager since October 2002. From 1994 until September
2002, Mr. Savir was Head of the Financial Services and Workout Division of Bank
Hapoalim B.M.

     (4) Mr. Rimon Shmaya has served as our Comptroller since January 1998 and
as a member of our management since May 1996.

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     (5) Mr. Nathan Dekel has served as our Operations Manager since July 1999.
Prior to that, he served as the Business Department Manager and has been a
member of our management since 1990.

     (6) Mr. Michael Warzager has served as our General Counsel since March
1998. Prior to that, he was the Head of our Legal Department.

     (7) Mr. Itzhak David has served as our Internal Auditor since November
2002. Prior to that, he served as assistant to the Internal Auditor for
approximately one year. From 2000 to 2001, Mr. David was Chief Financial Officer
of Ampa Investments Ltd. From 1994 until 2000, he was the Chief Financial
Officer and Secretary of The Investment Company for Industrial Development in
Israel Ltd. and its subsidiaries.

FAMILY RELATIONSHIPS

     No family relationships exist between any of our directors or executive
officers and any other directors or executive officers of the Bank.

SELECTION OF DIRECTORS AND OFFICERS AND TERMS OF OFFICE

     Except for the outside directors (the election and removal of which are
discussed in the next paragraph) and the Chairman of the Board (who is appointed
by the other Board members), our directors are appointed by the holders of our
Ordinary A Shares, par value NIS 0.10. See "Item 7. Major Shareholders and
Related Party Transactions-Major Shareholders" below for more detailed
information regarding the ownership of our Ordinary A Shares.

     Each holder of Ordinary A Shares is entitled to appoint one director for
every 1,015 Ordinary A Shares held by such holder, and each group of
shareholders (who together hold 1,015 or more Ordinary A Shares) is entitled to
appoint one director for every 1,015 Ordinary A Shares held. As a result, the
Government of Israel currently has the right to appoint seven directors, Bank
Leumi le-Israel B.M. currently has the right to appoint three directors, Israel
Discount Bank Ltd. currently has the right to appoint one director and Bank
Hapoalim B.M. currently has the right to appoint one director. However, we have
been advised by Bank Hapoalim B.M. that pursuant to an agreement between Bank
Hapoalim B.M. and certain other holders of Ordinary A shares (which holders
together have 500 Ordinary A Shares), Bank Hapoalim B.M. is entitled to vote
such other voters' shares for the purpose of appointing directors. By virtue of
this agreement, by combining its own shares and the shares of the other holders
party to the agreement, Bank Hapoalim B.M. is entitled to appoint one additional
director. The directors appointed by the State of Israel serve three year terms,
and the term of the current directors who are State of Israel's appointees will
expire in November 2008. The outside directors are appointed for three year
terms, and the term of the current outside directors will expire in March 2009.
The directors who are appointed by the banks serve as such until removed by the
appointing bank.

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     Pursuant to the Companies Law, we are required to have at least two outside
directors elected by our shareholders voting at a general meeting of the
shareholders, at least one of whom must have accounting and financial expertise
and the others must have professional skills, according to the definition of
these terms in the aforementioned law. At the time of the appointment or during
the two years preceding the appointment, neither the outside director himself
nor any of his relatives, partners, employers or companies in which he is a
controlling member may have had an interest in the company to whose board the
outside director is to be appointed. Among the other qualifications for
election, no individual shall be appointed an outside director if his other
positions or affairs create or are liable to create a conflict of interest with
his position as director. Our outside directors hold office for a term of three
years and, according to the Companies Law, outside directors may be elected for
one additional three-year term after the initial three-year term. Our outside
directors are Ehud Green and Aharon Hildesheimer.

     In order to facilitate the appointment of outside directors at the
shareholders' general meeting without exceeding the maximum number of directors
prescribed by our Articles of Association and by Israeli Proper Banking
Procedures, special arrangements have been reached by our major shareholders.
The Government of Israel has agreed to refrain (subject to various conditions)
from exercising its right to appoint one director of the seven that it is
entitled to appoint. Bank Leumi le-Israel B.M., Israel Discount Bank Ltd. and
Bank Hapoalim B.M. groups have agreed that they will refrain (subject to various
conditions), through a rotation among them, from exercising their right to
appoint one director of the seven that they are jointly entitled to appoint.
Consequently, as long as these consents remain in force, the two outside
directors may be elected by the shareholders at a general meeting, on account of
the vacancies created by the above consents. Under these arrangements, the
outside directors elected by the shareholders at a general meeting should be the
candidates put forward by the shareholders who created the vacancies.

     Shareholders who, by virtue of their ownership of Ordinary A Shares, have
appointed a director may remove such director at any time and appoint another in
his or her place. Each director (who is appointed by the holders of Ordinary A
Shares), therefore, holds office until removed by the holders of Ordinary A
Shares who originally appointed such director or, if appointed for a fixed term,
until such term expires.

     In addition to the provisions that apply to all directors regarding their
removal, the Companies Law established additional, special provisions regarding
the removal of an outside director. Pursuant to these provisions:

     1.   An outside director may be removed by court order, if the court (a)
          finds that the director is permanently unable to exercise his office;
          (b) the outside director no longer meets one of the conditions
          required by law for his appointment; (c) the outside director violated
          his obligation of loyalty to the company; or (d) the outside director,
          during his tenure, was convicted by a court abroad of offenses such as
          bribery, deceit or utilization of inside information.

     2.   Alternatively, if the board of directors determines that the outside
          director no longer meets one of the conditions required for his
          appointment or that he violated his obligation of loyalty, then the
          board of directors shall call an extraordinary meeting of the
          shareholders in order to present to the shareholders its reasons for
          the removal of the outside director. At such meeting, the outside
          director shall have an opportunity to respond. The removal of the
          outside director must be approved at the extraordinary meeting with
          the same majority that was necessary for his appointment.

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```

     Our General Manager is appointed by our Board of Directors and holds office
until removed by the Board or until the expiration of the term of his
appointment. The remainder of our executive officers are appointed by the
General Manager, subject to the approval of our Board of Directors.

COMPENSATION OF DIRECTORS AND OFFICERS

     The aggregate amount of remuneration that we paid to all directors and
executive officers as a group during the year ended December 31, 2006 was NIS
4,626,000 and we set aside and made provisions of NIS 1,270,000 to provide
severance pay, retirement or similar benefits for our directors and executive
officers.

     The following chart sets forth, on an individual basis, the compensation
paid to our executive officers:

                                       SEVERANCE      ADDITIONAL
    NAME                    SALARY       PAY(1)       AMOUNTS(2)    TOTAL(3)
    ----                    ------       ------       ----------    --------
                                         IN THOUSANDS OF NIS

Raanan Cohen                  602         177            ---           779
Uri Galili                    714         249            ---           963
Arieh Savir                   608         140            ---           748
Nathan Dekel                  596         231            ---           827
Rimon Shmaya                  590         165            ---           755
Itzhak David                  330          83            ---           413
Michael Warzager              588         225            ---           813

     (1)  Includes severance pay, provident fund, pension, national insurance,
          further education allowance, vacation pay, provisions/payments of long
          service bonus and provisions for unutilized sick leave benefits and
          vacation.

     (2)  Includes amounts with respect to salary-related benefits resulting
          from changes in the salary during any given year.

     (3)  Includes salaries and related benefits not including payroll tax.

     For a description of the severance pay agreements with our senior
executives, see Notes 18.A.2 and 18.A.4 to our financial statements.

     Pursuant to a resolution of our Board of Directors, which was approved by
the shareholders at a general meeting, the annual compensation paid to our
directors (other than our outside directors) is adjusted semi-annually to the
CPI. As of the last compensation update on February 1, 2007, the annual
compensation paid to our directors (other than our outside directors) was NIS
32,676, plus V.A.T., paid on a monthly basis. Outside directors are paid NIS
33,600 annually.

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     In addition, our directors receive compensation for each plenum or
committee meeting attended. The amount of compensation paid for plenum and
committee meetings is also updated semi-annually to the CPI. Our directors
(other than our outside directors) receive as of February 1, 2007, NIS 1,219
plus V.A.T. for each plenum and committee meeting attended while our outside
directors received NIS 1,250.

     The amounts set forth in the preceding two paragraphs are after a 12%
reduction in compensation pursuant to a resolution of the Board on October 1,
2002, which resolution was made in light of our financial situation. In
addition, the amounts set forth in the preceding two paragraphs do not apply to
our Chairman of the Board, who receives a monthly salary in accordance with his
employment contract.

     Except for our Chairman of the Board of Directors, none of our directors
has a service contract with us. The service contract for our Chairman of the
Board of Directors provides that, upon the termination of his employment, we
must pay him compensation for unused vacation days and make available to him the
amount deposited for his benefit, during his employment with us, into insurance
policies or pension funds.

     In the past, we signed individual employment contracts with three of our
senior executives. Under these contracts, each party has the right to terminate
the employee-employer relationship by providing an advance notice of three
months.

     In accordance with these contracts, in the event of resignation of the
executives, the Bank shall pay them additional severance payments and an
"adaptation bonus" in addition to the regular severance pay. In the event that
we terminate their employment, these executives are entitled to either severance
pay at higher rates or to early pensions. In August 2006, the employment
contracts of these three executives were amended with regard to the severance
terms in the event of termination by the Bank. The amended terms, which in
general are inferior to those included in the original employee contracts, were
determined based on the principles of the collective agreement dated December
26, 2002 and with the approval of the Commissioner of Wages and Labor Agreements
in the Israeli Ministry of Finance.

     We have an appropriate provision included in the reserve for severance pay
in respect of these agreements, which as at December 31, 2006 amounted to NIS
6.5 million.

     On May 30, 2007 the Audit Committee and the Board of Directors of the Bank
confirmed that the Chairman of the Board of the Bank, Dr. R. Cohen, the General
Manager of the Bank, Mr. U. Galili, and the Deputy General Manager, Mr. A.
Savir, shall be entitled at the conclusion of their service to additional
severance payments (in addition to the funds allocated for their benefit to
employees' benefit insurance and/or a pension fund) in the amount of one month's
salary for each year of service and the proportionate part of a month for each
part of a year.

     This resolution is subject to the approval of the Commissioner of Wages and
Labor Agreements at the Ministry of Finance. The Commissioner has advised that
he has no objection to the language of the resolution. However, his approval
would be given only for termination of employment at the end of the Bank's
Run-Off Plan (which is supposed to end on July 31, 2008) or if the ownership of
the Bank is transferred to an outside investor prior to the end of the run-off
period. The approval of the additional severance payments to the Chairman of the
Board is also subject to the approval of the Bank's shareholders at the next
general meeting of shareholders.

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```

     The terms of service of the Chairman of the Board of the Bank, Dr. R.
Cohen, the General Manager of the Bank, Mr. U. Galili, and the Deputy General
Manager, Mr. A. Savir, began on different dates during the second half of 2002.
Therefore, assuming their termination at the conclusion of the Run-Off Plan on
July 31, 2008, we are dealing with additional severance payments of about 6
months' salaries for each of them. In such case, the cost of the additional
severance payments for all three of them for the above period amounts to about
NIS 0.9 million.

     We granted an indemnification agreement to our directors and senior
officers, which was approved by our shareholders' general meeting on August 8,
2002. Pursuant to the agreement, we undertook to indemnify our directors and
senior officers for a monetary obligation imposed on them in favor of a third
party pursuant to a judgment (including a judgment by way of settlement or by an
arbitrator's decision which was approved by a court) and for reasonable
litigation expenses (including lawyers' fees), imposed upon them in consequence
of an act (defined as including omissions and decisions) performed or to be
performed by virtue of their being directors or senior officers in the Bank or
by virtue of any office or function they fulfilled and/or will fulfill according
to our request or in our name within any company in which we hold and/or will
hold shares and any other entity and any business venture in which we invested
and/or will invest, on condition however that such activities are related to at
least one of the types of events detailed in the indemnity agreement, which
include, among others, the following events: offering of securities,
implementing voting rights and rights to appoint directors in a company in which
we hold and/or will hold shares and/or in another entity and/or in a business
venture in which we invested and/or will invest, realization of collateral
granted to us, approval of credit and other acts within the framework of
permitted activities for banks pursuant to the Banking Law (Licensing)
1981-5741, holding of assets in trust, granting of underwriter's undertaking, a
transaction of the Bank concerning any assets for our account, giving any report
or notice pursuant to the law, receipt of licenses and permits, events related
to employer-employee relations and the failure to perform one or more of the
above matters.

     The total and cumulative amount of indemnification that could be paid
pursuant to the above agreement shall not exceed 25% of our equity according to
our financial statements as of March 31, 2002, which stood at NIS 640,300,000.
This means it shall not exceed NIS 160,075,000 (linked to the CPI published for
the month of March 2002). The indemnification pursuant to the indemnification
agreement is subject to the provisions of the Companies Law and to the various
conditions detailed in the indemnification agreement

     It is noted that Amendment 3 to the Companies Law (dated March 7, 2005)
provides, INTER ALIA, that an indemnification commitment (such as the
aforementioned indemnification agreement) has to be limited to events the board
of directors believes may actually occur at the time of providing the
indemnification commitment and to an amount or criterion the board of directors
deems as reasonable under the circumstances of the matter. The question of the
amendment applying to existing indemnification agreements and the interpretation
of the aforementioned restriction have not yet been addressed in court rulings
and therefore the effects of the amendment on the aforementioned indemnification
agreement are uncertain.

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BOARD PRACTICES

     During 2006, our Audit Committee was composed of Yeheskel Beinisch, who
served as the Audit Committee Chairman, Yacob Aizner, Shulamit Eshbol, Ehud
Green and Aharon Hildesheimer (Ehud Green and Aharon Hildesheimer were appointed
to the Audit Committee on April 30, 2006). The Audit Committee operates pursuant
to the Audit Committee procedures, which were ratified by our Board of
Directors. The primary functions and responsibilities of the Audit Committee,
are as follows:

     1.   To provide recommendations to the Board of Directors regarding the
          appointment or termination of the appointment of the internal auditor.

     2.   To define the responsibilities of the internal auditor.

     3.   To review and make recommendations to the Chairman of the Board of
          Directors regarding the internal auditor's work plan.

     4.   To review the periodic and special reports of the internal auditor.

     5.   To review the audit reports of the Supervisor of Banks and the
          external auditor.

     6.   To review the implementation of the internal auditor's work plan, at
          least quarterly.

     7.   To review the handling of irregularities reported by the internal
          auditor concerning the activities of the Board of Directors

     8.   To review the correction of defects raised in the internal auditor's
          reports.

     9.   To approve (subject to the approval of the Board of Directors and the
          shareholders at a general meeting) the terms of service of directors,
          including remuneration, the granting of insurance, exemption from
          liability and indemnification, and to approve (subject to the approval
          of the Board of Directors and/or, to the extent required by our
          Articles of Association, subject also to the approval of the
          shareholders at a general meeting) the granting of insurance,
          exemption from liability and indemnification to officers who are not
          directors.

     10.  To approve (subject to approval of the Board of Directors) any
          extraordinary transactions between us and a third party in which any
          of our directors or officers has a personal interest.

     11.  To approve (subject to the approval of the Board of Directors and the
          shareholders at a general meeting) extraordinary transactions between
          us and any of our controlling shareholders, and extraordinary
          transactions between us and a third person, in which any of our
          controlling shareholders has a personal interest.

     12.  To approve transactions between us and associated parties (as defined
          in the Proper Banking Procedures), the amounts of which exceed the
          minimum prescribed by the Proper Banking Procedures.

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```

     During 2006, our Administration Committee was composed of Dr. Raanan Cohen,
Richard Armonn, Avi Olshansky, Moshe Gavish and Aharon Hildesheimer (Aharon
Hildesheimer was appointed to the Administration Committee on April 30, 2006).
The Chairman is Dr. Raanan Cohen. The primary functions and responsibilities of
the Administration Committee are as follows:

     1.   To approve organizational changes proposed by the General Manager.

     2.   To approve collective employment agreements pursuant to guidelines set
          by the Board of Directors.

     3.   To review work plans as presented by the General Manager and recommend
          their approval by the Board of Directors.

     4.   To review our overall budget as presented by management and recommend
          its approval by the Board of Directors.

     5.   To approve our senior authorized signatories.

     During 2006, our Credit Committee was composed of Dr. Raanan Cohen, Richard
Armonn, Avi Olshansky, Yacob Aizner, Ehud Green and Ben-Zion Dagan. Mr. Ehud
Green's term as an outside director ended on December 25, 2005; he was re-named
to the Credit Committee on April 30, 2006. The Chairman is Richard Armonn. The
primary functions and responsibilities of the Credit Committee are as follows:

     1.   To approve loans for customers whose outstanding debt (including the
          new proposed loan) to us is between NIS 15-50 million (for regular
          customers) provided that the unsecured portion of the debt does not
          exceed NIS 30 million, or NIS 15-30 million (for problem customers).

     2.   To approve the rescheduling of debt or the reorganization of debt for
          customers whose outstanding debt to us is between NIS 15-50 million
          (for regular customers), or between NIS 15-30 million (for problem
          customers).

     3.   To approve write-offs of loans between NIS 0.75-3 million for any one
          customer.

     During 2006, our Financial Statement Review Committee was composed of Dr.
Raanan Cohen, Shulamit Eshbol, Yeheskel Beinisch, Moshe Gavish, Ben-Zion Dagan,
and Ehud Green. Ehud Green was appointed to the Financial Statement Review
Committee on April 30, 2006. The Chairman is Dr. Raanan Cohen. The primary
functions and responsibilities of the Financial Statement Review Committee are
as follows:

     1.   To review drafts of the annual and quarterly financial statements
          prior to their presentation to the Board of Directors.

     2.   To keep regular contact with the external auditors and our comptroller
          on matters relating to accounting principles implemented in the
          financial statements.

     3.   To review all matters relating to the financial statements brought
          before it by the Board of Directors.

     We do not have a remuneration committee.

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DIRECTORS HAVING ACCOUNTING AND FINANCIAL SKILLS/EXPERTISE

     The Bank of Israel has instructed the banks to implement (with certain
changes and adjustments) a directive that had been initially issued by the
Israel Securities Authority in 2003 relating to directors' accounting and
financial skills. According to the directive of the Israel Securities Authority
and the instructions of the Bank of Israel, a bank has to determine the minimum
number of directors having accounting and financial skills that should serve on
the bank's board of directors, the audit committee and the financial statement
review committee, with "a director having accounting and financial skills" being
a director that does not hold any other position in the company and due to his
education, experience or qualifications, has high skills and understanding in
business, accounting, internal control and financial statement matters, in a way
that enables him to have an in-depth understanding of the financial statements
of the company and to raise on the agenda of the board of directors issues and
questions relating to the financial reporting of the company, with the objective
of approving and publishing fair financial statements.

     During 2005 Amendment No. 3 to the Companies Law was passed, by which,
INTER ALIA, a public company must have at least one outside director who has
accounting and financial expertise and additional directors having accounting
and financial expertise in the number determined by the board of directors. The
definition of "accounting and financial expertise" was included in regulations
that were published at the end of 2005 and it is essentially similar to the
definition of "accounting and financial skills" described above (other than its
not including a threshold condition of not holding an additional position in the
company).

     We have implemented both the directive of the Israel Securities Authority
regarding directors having accounting and financial skills as instructed by the
Bank of Israel and pursuant to the provisions of the Companies Law and
aforementioned amendments with respect to directors having accounting and
financial expertise. Our Board of Directors has decided that the appropriate
minimum number of directors having accounting and financial skills/expertise
that should serve on our Board of Directors is two, being of the opinion that in
light of the significant decrease in the volume of our activities, the reduction
in the lines of operation in which it is engaged and the focus on the collection
of loans, this number is adequate in order to enable the Board to fulfill the
duties it has to perform in accordance with the Law and our Articles of
Association, and, in particular in relation to the examination of our financial
position and the preparation and approval of our financial statements.

     Our Board of Directors also decided that the appropriate minimum number of
these directors on the Audit Committee and the Financial Statement Review
Committee is one. As of June 1, 2007, the Bank has eight directors with
accounting and financial skills/expertise on its Board of Directors. It has
three such directors on the Audit Committee and four such directors on the
Financial Statement Review Committee. The directors having accounting and
financial skills/expertise and the facts that support them as such are as
follows:

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DR. RAANAN COHEN: Chairman of the Board of Directors of the Bank from August 15,
2002. He is also the Chairman of the Financial Statement Review Committee. He
has taken academic courses in risk management, investments in securities and in
financial instruments, directors' training and company recovery laws. Dr. Raanan
Cohen also serves as a director of Trans Clal Trade Ltd. (member of the
Financial Statement Review Committee) and of Phoenix Insurance Company Ltd.
(Chairman of the Audit Committee).

A. OLSHANSKY: Bachelor of Economics from the Hebrew University. Served in the
past in various positions in Bank Hapoalim B.M., including VP, Deputy CEO and
joint CEO. Acted as CEO of Gmul Investment Company Ltd. (central management
company of pension funds). Served as Chairman of the Board of Clal (Israel)
Ltd., which operated companies in the insurance, industry, commerce and
construction fields. Mr. Olshansky served and is serving as a director in
various companies. He also engages in financial and economic consulting.

Y. AIZNER: Member of the Audit Committee. Bachelor of Economics and Statistics,
studied business administration at the Hebrew University. In the past, Mr.
Aizner served for several years as CEO of Bank Jerusalem Ltd. and as a director
of the bank and its subsidiaries, and prior to that as Deputy CEO of that bank.
Mr. Aizner is also a director of Sadot Binyamina Ltd. and serves as the head of
the Investment Committee of the Teachers' Education Fund.

S. ESHBOL: CPA and lawyer. Member of the Audit Committee and the Financial
Statement Review Committee. Ms. Eshbol has a Bachelor of Accounting with
secondary courses in financing from the College of Administration and a Bachelor
of Laws from the Herzliya Interdisciplinary Center. Ms. Eshbol engaged in
accounting in the past and for the last several years has been practicing law.
As part of her legal practice is engaged in commercial and financial fields. She
has served as director of other companies.

M. GAVISH: Member of the Financial Statement Review Committee. Mr. Gavish holds
a Bachelor of Economics and Law and Master of Business Administration from the
Hebrew University. He served as Commissioner of the Income Tax and Property Tax
Authority and as CEO of Mercantile Discount Bank. Mr. Gavish has also served and
is serving as CEO of certain companies, as chairman of finance committees of
various entities, as director of several companies, including as Chairman of the
Israel Broadcasting Authority. In addition, Mr. Gavish serves as a consultant to
companies.

B. DAGAN: Member of the Financial Statement Review Committee. He holds a
Bachelor of Economics, Political Science and Public Administration from the
Hebrew University and took courses in business administration. Mr. Dagan served
as a counselor for small businesses, as division manager at the Ministry of
Trade and Industry and as manager of the imports and exports financing
department in foreign currencies at the Ministry of Finance. Served as a
director of a number of companies.

R. ARMONN: Bachelor of Political Science, studied business administration at the
Hebrew University. Studied law at the Parhom University of Bucharest. Served in
the past as Deputy CEO of Bank Hapoalim B.M. and was in charge of credits in
that bank. Mr. Armonn also served as Deputy CEO and Chairman of the Board of
Gmul Investment Company Ltd. (central management company of pension funds) and
as director and chairman of the board of various other companies. He has been a
director of the Bank since 1967 (not continuously), and served as Chairman of
the Loan Committee of the Board.

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A. HILDESHEIMER: Member of the Audit Committee. Bachelor of Economics and
Political Science, and Master of Business Administration from the Hebrew
University. In the past, Mr. Hildesheimer filled a number of positions at
Mizrahi Bank Ltd., including assistant to the CEO and Deputy CEO. He also served
as the CEO of Finance and Trade Bank Ltd. and as a director in various
companies. Currently, Mr. Hildesheimer engages in economic and financial
consulting.

EMPLOYEES

     As of December 31, 2006, we had 50 employees, as follows:

     Personnel/Training Staff                   2
     Compliance and Auditing                    1
     Officers                                   6
     Professional Staff                        17
     Support Staff                             24

     All of our employees and officers reside in Israel and work at our offices
in Tel Aviv.

     The reduction in our operations pursuant to the Run-Off Plan was
accompanied also by a reduction in our staff. The number of our employees as of
December 31, 2006 is about 29% of the number that were employed on December 31,
2002.

     25 of our employees as of December 31, 2006 are subject to collective
employment agreements entered into between us, the General Federation of Labor
and our employees' committee.

     Pursuant to the Basic Budget Law - 1985 (Israel), "mixed companies," as
defined in the Government Companies Law, shall not agree to changes in wages,
severance payments, retirement or other employment-related financial benefits
and shall not institute such changes or benefits other than changes that have
either been (i) agreed to or instituted with respect to all of the state
employees, or (ii) approved by the Minister of Finance. The Minister of
Finance's authority to approve such changes was delegated to the Commissioner of
Wages and Labor Agreements in the Ministry of Finance.

     We are a "mixed company" as defined in the Government Companies Law and the
opinion of the Commissioner of Wages and Labor Agreements in the Ministry of
Finance is that the above Basic Budget Law applies to us. The collective
agreement entered into between us and some of our employees, in December 2002
was approved, upon our request, by the Commissioner of Wages and Labor
Agreements in the Ministry of Finance and he also approved certain severance
payments to our officers, which were lower than those stipulated in their
employment agreements. The collective agreement was subsequently extended with
the approval of the Commissioner of Wages and Labor Agreements in the Ministry
of Finance until the earlier of the termination of the Run-Off Plan and December
31, 2008.

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SHARE OWNERSHIP

     None of our directors or executive officers own any of our shares. We do
not have any arrangements, including stock option plans, which provide for the
issuance of our securities to our directors or officers.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.   MAJOR SHAREHOLDERS

RELATIONSHIP OF THE BANK TO THE GOVERNMENT OF ISRAEL

     As of December 31, 2006, the State of Israel held approximately 80% of our
equity and approximately 45.78% of our outstanding voting rights and had the
right to appoint approximately 50% of the directors (based upon the actual
number of directors the State of Israel is entitled to appoint out of the total
number of directors that may be appointed by the shareholders). Directors
appointed by both the Ministry of Finance and the Ministry of Industry, Trade
and Employment are members of our Board of Directors.

     The Government has issued guarantees in our favor (which guarantees are
also granted to other banks) to secure loans granted by us in cases where the
Government was interested in supporting the projects being financed by such
loans.

     In accordance with the governmental approval of the Run-Off Plan, the
Government is responsible for the repayment of the special line of credit as
from July 1, 2005, on the condition that the interest rate on the credit line
until the end of the Run-Off Plan shall not exceed the Bank of Israel Rate. If
at the end of the Run-Off Plan there remains an unpaid balance of the special
line of credit, the Government will repay the balance to Bank of Israel by July
31, 2008. In exchange for its repayment of the credit balance, the collateral
that was provided by the Bank for repayment of the credit line will be assigned
to the Government. It is our understanding that the Government's assuming
responsibility for the repayment of the balance of the special line of credit
does not derogate from our primary obligation to repay the outstanding balance
to the Bank of Israel. See "Item 4. Information on the Company-Business
Overview" above for a discussion of the special line of credit from the Bank of
Israel.

     Since the State of Israel holds approximately 45.78% of our voting rights
and about 50% of the rights to appoint directors, we are considered a "Mixed
Company" under the Government Companies Law, and therefore we must report to the
Governmental Companies Authority. Due to the State of Israel's entitlement to
appoint directors to our Board, we are also considered as a "body that the
Government of Israel participates in its management" within the State
Comptroller Law-1958 (Israel), and consequently we are subject to the State
Comptroller's audit.

     During the last several years, the State of Israel has purchased our D
Shares and DD Shares in off-floor transactions. The shares that were purchased
in the years 2005 and 2006 and their purchase prices were as follows:

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                             2006                                                          2005
----------------------------------------------------------------   ------------------------------------------------------------
                                                      PURCHASE                                                      PURCHASE
                 NUMBER OF                           PRICE PER               NUMBER OF                              PRICE PER
CLASS OF          SHARES              HOLDING %      SHARE (IN    CLASS OF    SHARES              HOLDING %         SHARE (IN
SHARES           PURCHASED      OF PURCHASED SHARES  US DOLLARS)   SHARES    PURCHASED       OF PURCHASED SHARES    US DOLLARS)
------           ---------      -------------------  -----------   ------    ---------       -------------------    -----------
                                  IN        IN VOTING                                           IN    IN VOTING
                                EQUITY       RIGHTS                                          EQUITY     RIGHTS
                                ------      -------                                          ------   ----------

D                   391          0.01%           -         90          D       1,165           0.03%        -            90

DD                  415          0.59%           -      1,000         DD       1,339           1.90%        -         1,000

     To our knowledge, the D Shares were purchased by the State based upon a
declaration that was included in the letter of the Minister of Finance, Mr.
Pinchas Sapir, dated February 15, 1967 (which was addressed to the Vice
President of Capital For Israel Inc.) by which the State of Israel intends to
purchase D Shares upon their registration for trading on the Tel Aviv Stock
Exchange, at prices between 90% and 95% of their par value, which is US$ 100 per
share.

     To our knowledge, the DD Shares were purchased by the State following the
declaration that was included in the prospectuses for the issuance of these
shares, by which the State of Israel agreed that if these shares are offered for
sale on the Tel Aviv Stock Exchange anytime during the 20 years from the date
they were issued to the public, it would cause them to be purchased at a price
equal to 90% of the $ 1,000 per share at which they were issued, and beginning
from the 21st year from their issuance - at a price equal to 100% of the said
price at which they were issued.

     The D Shares and DD Shares were de-listed from the stock exchange in the
1990s. To our knowledge, the State's continued purchase of these shares is
nonetheless based upon the foregoing undertakings. As indicated by the data in
the foregoing table, the State's holdings of these shares do not confer control.

     Investigations conducted and still being conducted by the Bank show that
apparently the State of Israel purchased additional D Shares and DD Shares many
years ago from U.S. residents, without such purchases being recorded in the
Bank's shareholders registry. From investigations made to date, it seems that
the number of shares that were not recorded and, consequently, not reported is
relatively small when compared with the reported holdings of the State of Israel
in these shares and may reach a few thousand shares. The Bank will update its
disclosure once the investigation is concluded and confirmed information is
obtained.

SHAREHOLDERS IN THE UNITED STATES

     The number of holders of shares in the United States and the number of
shares that such holders held as of June 30, 2007 is set forth below:

     6% C Shares - 1,122 holders in the United States, holding 2,015,774 shares.

     6% CC Shares - 745 holders in the United States, holding 116,388 shares.

     7-1/2% D Shares - 595 holders in the United States, holding 13,459 shares.

     7-1/2% DD Shares - 1,496 holders in the United States, holding 8,081
shares.

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PRINCIPAL HOLDERS OF VOTING SECURITIES

     The following table sets forth, as of May 31, 2007, certain information
concerning ownership of our voting securities, including all persons known by us
to own more than 5% of any class of our voting securities and the total amount
of any class of our voting securities owned by our officers and directors as a
group:
                                                                                                                  PERCENTAGE OF
                                                                          NUMBER OF SHARES   PERCENTAGE OF         TOTAL VOTING
      NAME OF HOLDER                       TITLE OF CLASS                      OWNED          CLASS OWNED          RIGHTS HELD
      --------------                       --------------                      -----          -----------          -----------

State of Israel                          Ordinary A Shares(1)                 7,370              48.81%               45.78%
Bank HaPoalim B.M. Israel (3)            Ordinary A Shares(1)                 1,830              12.12%               11.37%(4)
Israel Discount Bank Ltd.,               Ordinary A Shares(1)                 1,530              10.13%                9.50%
Bank Leumi le-Israel B.M Israel (5)      Ordinary A Shares(1)                 3,110 (6)          20.60%               19.32%
Bank Hapoalim B.M Israel (5)             Ordinary Preferred Shares(2)        65,020 (7)           6.50%                0.40%
All officers and directors as a group    Voting shares                     None (as per
                                                                           the records
                                                                           of our Bank)

     (1)  Each Ordinary A Share entitles the owner thereof to 1,000 votes at any
          meeting of our shareholders.

     (2)  Each Ordinary Preferred Share entitles the owner thereof to one (1)
          vote at any meetings of our shareholders.

     (3)  The Ordinary A Shares are listed in the name of Poalim Trust Services
          Ltd., which reported to us that said shares are held in trust, as
          follows:

               1,829.8 Shares held for Bank Hapoalim B.M.

               0.20 Shares held for David Shocnay

     (4)  We have been advised by Bank Hapoalim B.M. Israel that according to an
          agreement between them and Israeli Manufacturers Association, Bank
          Hapoalim B.M. Israel was granted the voting rights related to 250
          Ordinary A shares held by the Israeli Manufacturers Association. In
          light of this agreement, Bank Hapoalim B.M. Israel holds 13.32% of the
          voting rights.

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     (5)  Includes shares held by affiliates of the shareholder

     (6)  Includes 1,050 or 6.95% held by Bank Leumi Lepituah Hataasiya Ltd., an
          affiliate of Bank Leumi le-Israel B.M.

     (7)  Held of record (not beneficially) by Hevra Lerishumim shel Bank
          Discount le-Israel. The shares are beneficially held by Bank Hapoalim
          B.M. and its affiliates.

B.   RELATED PARTY TRANSACTIONS

     "Related Parties" and "Interested Parties" of the Bank, as defined in
Opinion No. 29 of the Institute of Certified Public Accountants in Israel and
the Securities Regulations (Preparation of Annual Financial Statements) - 1993,
are: The State of Israel; Bank Hapoalim B.M.; Israel Discount Bank Ltd.; Bank
Leumi le-Israel B.M.; the General Manager, Directors of the Bank and companies
related to them, affiliates of the Bank and their related companies.

     We conduct transactions with all or some of the aforementioned parties, in
the ordinary course of business on terms applicable to our transactions in
general. Following are the material transactions with these parties.

     Credit to the Israel Electric Corporation Ltd. and deposits of the State of
Israel- We have provided long-term credit to the Israel Electric Corporation
Ltd. (a Government-owned company) which was granted out of a deposit of the
State of Israel. The State provided us a guarantee as security for the repayment
of such credit. As of December 31, 2006 the balance of the credit was NIS 5,671
million (as of March 31, 2007 - NIS 5,525 million) compared with NIS 6,405
million as of December 31, 2005. An expense of NIS 89 million was recorded in
respect of the aforementioned credit in 2006. This refers to dollar-denominated
credit; due to the decrease in the exchange rate of the dollar, negative
exchange rate differentials were recorded. In 2005, income of NIS 804 was
recorded, constituting more than 10% of the profit from financing operations
before the allowance for doubtful debts in the said year.

     As aforementioned, the source for this credit was a deposit of the State of
Israel. In addition to the said deposit, the balance of the Government deposits
includes deposits made in order to provide loans within the framework of the
Kibbutzim arrangement and other deposits made in order to provide other
long-term loans. As of December 31, 2006 the overall balance of the Government
deposits amounted to NIS 6,087 million (as of March 31, 2007 - 5,920 million)
compared with NIS 6,883 million as of December 31, 2005. Financing income in an
amount of NIS 84 million was recorded in 2006 in respect of the Government
deposits compared with an expense of NIS 902 million in 2005.

C.   INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.

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ITEM 8. FINANCIAL INFORMATION

A.   CONSOLIDATED FINANCIAL STATEMENT AND OTHER FINANCIAL INFORMATION

     OUR FINANCIAL STATEMENTS ARE PREPARED IN ACCORDANCE WITH ISRAELI GAAP AND
WITH THE DIRECTIVES OF THE ISRAELI SUPERVISOR OF BANKS. ISRAELI GAAP MAY DIFFER
SIGNIFICANTLY FROM U.S. GAAP. SEE "ITEM 17. FINANCIAL STATEMENTS," IN PARTICULAR
NOTE 32 THERETO, WHICH SETS FORTH THE PRINCIPAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP.

LEGAL PROCEEDINGS

     Set forth below are certain details regarding material legal proceedings
against us which were pending as of June 30, 2006:

     (A) In August 2000, a claim, originally fixed for court fees in the sum of
US$18,666,711 and which was later increased to US$ 22.5 million, was filed by
several venture capital funds against Mr. Blass, our former deputy general
manager, and twenty four other defendants alleging a violation of an investment
agreement by Mr. Blass and the other defendants. In addition to damages, the
claimants also seek receiving shares in kind. Mr. Blass rejects the claim and he
has instructed his lawyer to file a statement of defense. The claim was filed
against Mr. Blass in his capacity as a director in the company in which the
investment was to be made, Jolt Ltd. At that time, Mr. Blass served as the
general manager of our subsidiary and was appointed by our subsidiary as
director in the above company. In 2000, we sold all of our holdings in the
subsidiary. The insurers carrying the directors and senior officers liability
insurance policy have recently notified us that in their opinion the claim does
not have insurance coverage, but it is the opinion of the legal counsels
handling the claim on our behalf that if the said executive has to make any
monetary payment in respect of the suit, the payment will be covered by the
insurance policy.

     (B) In October 2002, a class action was filed against us, the State of
Israel (as our controlling shareholder) and seventeen of our current and former
officers and directors (two of whom were later struck from the statement of
claim). This action was instituted by Mr. A. Finn, one of our shareholders. The
action was instituted in the name of all those who purchased our shares between
December 1, 2001 and August 22, 2002. The claim alleges that we breached our
duty to report pursuant to the Securities Law - 1968 (Israel) and the Securities
Regulations (Immediate and Periodic Reports) - 1970 (Israel). According to the
action, between December 1, 2001 and August 22, 2002, several events occurred
which demonstrated our severe condition. The claim alleges that the occurrence
of the events obligated us to file an immediate report pursuant to Israeli
securities regulations, and that such report was not filed. The claim seeks
damages of NIS 20 million or in the alternate, of NIS 14 million. We have
instructed our lawyers to file the appropriate defenses. Under Israeli law, the
filing of a class action must be certified by the court. Accordingly, the
plaintiff has filed an application for certification, which has yet to be heard.
We and those of our officers and directors who were sued, are contesting the
action and the application for its certification. We and the plaintiff agreed on
a mediation proceeding, however this proceeding was not successful and was
terminated.

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     On May 17, 2005, the court granted the plaintiff's motion for discovery of
documents and ordered us to produce most of the requested documents, including
minutes of the meetings of our Board of Directors and our Credit Committee,
audit reports of the Supervisor of Banks, and specific correspondence. We
appealed the above decision regarding discovery of documents. The appeal was
denied by the District Court and we have appealed to the Supreme Court. On
January 22, 2007, the Supreme Court decided, with the consent of the parties,
that part of the documents in respect of which the Bank filed its appeal would
not be disclosed, whereas the others would be disclosed. The Bank transferred to
the plaintiff those documents which, by its understanding, it had to disclose.
On February 27, 2007, the plaintiff filed a motion to the District Court in
which he demanded that we disclose additional documents. We have yet to respond
to the motion. At a preliminary hearing regarding the motion to certify the
class action which took place on June 13, 2007, the parties notified the Court
that there were advanced negotiations between the Bank and the above plaintiff
and between the Bank and the underwriters of the Bank's D&O policy, to settle
the action.

     On July 11, 2007, a settlement agreement was signed between the parties,
which is subject to the approval of our shareholders at their general meeting
(scheduled to be held on August 20, 2007) and the approval of the Court.
According to the settlement agreement, we will pay to the plaintiff class the
sum of NIS 4.7 million. In addition, we will pay a special remuneration to the
plaintiff, plaintiff's attorneys' fees and various other expenses, all of which
will amount to approximately NIS 1.5 million. At the same time, we have also
reached an agreement with our Directors and Officers insurers according to which
the insurers will reimburse us for half of the cost of the above-mentioned
settlement agreement with the plaintiff (up to a total amount of NIS 6.25
million) and an additional amount of NIS 1 million for legal expenses we have
incurred.

     (C) In March 2003, Lahava Chatamim Ltd., in its capacity as a shareholder,
filed a derivative action in the amount of NIS 409.5 million against us and
eleven of our current and former officers and directors. The plaintiff claims
that the officers and directors breached their duty of care and were negligent
in carrying out their duties, by granting credits without proper collateral. The
claimant argues that the breach and negligence are evidenced by the problems in
the bank credit policy, the quality of the credits, the procedures employed for
granting the credits, the management of credit risk and the routine handling of
credits. The alleged damages are equal to the allowances for doubtful debts we
made in our financial statements for 2002. Under Israeli law, the filing of a
derivative action must be approved by the court. Accordingly, the plaintiff has
filed an application to that effect. The parties' witnesses were cross-examined
on May 26, 2005 and the parties last written summations were filed during the
last quarter of 2005. On June 18, 2006, the Court rendered its decision
rejecting the motion to certify the derivative action and awarded us and our
current officers and directors legal fees in the amount of NIS 40,000. On
September 18, 2006 the plaintiff filed an appeal with the Supreme Court on the
decision to reject the motion to certify the derivative action. The Supreme
Court set dates for the parties to submit written summations and also decided
that supplemental oral arguments shall be heard on November 26, 2007, which was
since rescheduled for February 14, 2008. On June 1, 2005, we received notices
from counsel to our directors and officers insurers that our insurers have
reservations as to the validity of the insurance coverage for this action and
that they reserve their rights in this matter. We categorically reject these
reservations and intend to act to exhaust our rights against the insurers. In
the opinion of the legal counsels handling the claim on our behalf, since the
claim is a derivative action, our exposure in respect thereto is only for
expenses (including court fees, expenses of the plaintiff, fee to the attorney
of the plaintiff and special compensation to the plaintiff).

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     (D) In September 2003, an Israeli oil company filed a claim against us and
two other banks, Israel Discount Bank Ltd. and United Mizrachi Bank Ltd., in the
amount of NIS 6 million, concerning the delivery of oil products by the
plaintiff to a power plant owned by a company that was a client of the three
defendant- banks. We, together with the other two named banks, financed the
building of the power plant. Our bank provided 26% of the financing for the
power plant and the management of the consortium of the bank financing was
performed by Israel Discount Bank Ltd. The plaintiff alleges that the
involvement of the three banks in the approval of the business plan and its
income and expense budget created a representation upon which the plaintiff
relied at the time that it provided its products to the plant, assuming that the
expenses included in the approved plan and/or budget would be paid by the above
banks. Due to the fact that the consideration for the products delivered was not
paid, the plaintiff claims that the banks are responsible to compensate it for
its losses. We and the other two banks reject the claim and our legal counsels
have filed the appropriate defenses.

     (E) In January 2004 a counterclaim in the amount of NIS 1,250,000 was filed
against us with the Tel Aviv-Jaffa District Court in the framework of a claim we
had filed against a company that had constructed a commercial and residential
project with our financing and against the guarantors for its debt. The
plaintiffs in the counterclaim are one of the responding guarantors and a
company he owns, and they contend that we had breached the guarantee contract,
that we had agreed to changes in the project and to an increase in the credit to
the project without the knowledge of the counter plaintiff and that we had also
been negligent in the financing we had provided for the project. The counter
plaintiffs contend that they incurred various damages as a result of the acts
and omissions they attribute to us, including the loss of their investment in
the company that had constructed the project. On March 12, 2007, the
counterclaim was dismissed pursuant to an agreement between the parties which
was approved by the court.

     (F) In March 2004, three companies that received various loans from us in
the past, filed a claim for a declaratory and monetary judgment against us, the
Chairman of our Board, our General Manager and one of our credit officers. The
three plaintiffs (against two of whom we have received final judgments), have
petitioned the court to declare, among other things, that they had entered into
a binding construction loan agreement with us. The plaintiffs claim that as a
result of our refusal to extend to them the construction loan to which we had
allegedly committed, they suffered damages of approximately NIS 200 million, but
in order to reduce court fees (while reserving their right to later amend the
amount of the claim), they fixed the amount of the monetary claim at NIS 1
million. We hold a final judgment, in a claim that we filed against one of the
three plaintiff-companies, which rejects the above allegation against us, as far
as that company is concerned. The parties agreed to suspend the filing of
further pleadings until after 45 days from the decision regarding our
applications to appoint receivers for the other two plaintiff-companies. On
December 26, 2005, the court granted our application and appointed permanent
receivers to the above two plaintiffs. On February 28, 2007, a settlement was
reached between us and the above plaintiffs regarding the payment of their debts
to us and on March 8, 2007, the plaintiffs' claim was dismissed.

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     (G) On June 30, 2004, two of our former senior employees filed a claim in
the Labor Court, seeking NIS 2,346,200 in the aggregate (nominal). The claim is
for various additional payments which, according to the claim, are due to them
in connection with the cessation of their employment in 2002 pursuant to the
terms of their employment contracts. The plaintiffs claim that in return for
these additional payments that were granted to them in their employment
contracts, they agreed to forfeit wage increases that were due to them at the
time. Therefore, the plaintiffs have alternatively petitioned the court to award
them the value of the wage increases that they agreed to forfeit. Despite the
fact that, according to the plaintiffs' claim, the value of the wage increases
is greater than the amount of the claim, in order to reduce court fees, they
have set their value equal to the amount of the claim. The payment of these
additional payments was not approved by the Commissioner of Wages and Labor
Agreements of the Ministry of Finance, who was also named in the claim as a
defendant. Following the notice given by the Commissioner of Wages and Labor
Agreements of his consent to pay to the plaintiffs certain payments in
settlement of the claim settlement that he offered them in the past, without
conditioning this on their waiving further claims, the plaintiffs motioned for a
partial judgment, under which we would pay to the two plaintiffs a total of
approximately NIS 415,000, reflecting the consent of the Commissioner of Wages
and Labor Agreements. We objected to this motion and the Labor Court has yet to
render its decision.

     (H) On September 28, 2004, 27 financial institutions that hold our C Shares
and/or CC Shares and/or CC1 Shares filed an action in the Tel Aviv District
Court, in which the court was petitioned, INTER ALIA, to direct us to pay to our
shareholders a dividend similar in amount and frequency as we had paid until the
payment of the last dividend for the second quarter of 2002. The plaintiffs
claim, INTER ALIA, that according to our Articles of Association, we are bound
to pay to our preferred shareholders an annual dividend in the amount of 7.5%,
that such dividend is not in essence a dividend, but rather a payment which is
paid in full by the State of Israel with respect to the perpetual deposits that
we deposited with the Treasury and, therefore, such distribution is not subject
to distribution requirements prescribed by law, and that even if such
requirements should be applied, we should be ordered to pay the requested
dividend because we meet the solvency requirement prescribed by law, and in
light of the fact that the dividend is financed in full by the State of Israel
and is not deducted from our capital. Since the issue of the dividend is
connected, in our opinion, to the issue of the accrual of interest on the Bank's
perpetual deposits with the Treasury, we filed, on March 9, 2005, a motion for a
declaratory judgment against the State of Israel and the above financial
institutions, stating that the interest on the perpetual deposits does in fact
accrue. The Court has decided to consolidate the two motions for declaratory
judgments. On December 27, 2005, the Minister of Finance filed his answer to the
two motions. The Minister's position is that the interest on the perpetual
deposits does not accrue (neither to our benefit nor to the benefit of our
shareholders) while we are not distributing dividends, and that in light of our
situation and regardless of the non-accrual of the interest, a distribution of a
dividend is not appropriate. On March 23, 2006, the Court decided that it will
first rule on the question of the accrual of interest on the perpetual deposits.
The parties filed briefs and are awaiting the Court's ruling. In the opinion of
our legal advisors, we would probably not be facing any monetary exposure as a
result of the originating motion that was filed against us.Our legal advisors
believe that should the Court order the payment of the dividend to the
petitioning financial institutions, the State will pay us the amount of the
dividend out of the interest on our perpetual deposits with the Treasury.

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     (I) On December 19, 2004, a company that used to be our client and its
shareholders filed an action against us in the amount of NIS 1,000,000.
Previously, we had filed an action against the company and its shareholders in
May 2004 in the amount of NIS 1,702,000 and their action was filed as a
counterclaim. They claim that following our crisis in 2002, we reduced the
company's credit line and ceased to provide the credits we had customarily
provided, thus reducing the company's activities and causing it damages and
losses. They also claim that we charged the account an excessive amount of
interest. The amount of their counterclaim is their evaluation of the damages
above the amount they claim as a set-off against our claim against them. On
December 21, 2005, judgment was given against us, in favor of the company, due
to non-filing of a statement of defense. On February 20, 2006, the court
approved an agreement that was reached between the parties whereby the judgment
against us would be struck out and our action would be renewed. The parties also
agreed as part of the agreement that our action would carry a reduced rate of
interest.

     (J) On October 10, 2005, a company that performs engineering and plumbing
work, filed a claim in the amount of NIS 1,356,459 against us, a receiver that
was appointed at our request to a residential and commercial project that
encountered difficulties, and the owner of the land that at the time had entered
into a joint venture with the promoter that had constructed the project with our
financing. The plaintiff company performed work on the project at the request of
the promoter, which had failed to repay its debt to the plaintiff company. The
claim states that the amount sought reflects the amount the promoter still owes
the plaintiff company in respect of the work it executed on the project with
interest and/or linkage differences. The plaintiff company contends that due to
the principles of construction loan financing and our having granted to the
promoter construction loans for construction of the project, we should be held
responsible for repayment of the debt. Furthermore, it contends that at the time
it had entered into the agreement with the promoter, we should have brought to
its attention the information the plaintiff contends was in our possession,
regarding the difficult condition of the promoter and the project. The handling
of the claim was transferred to the care of an attorney acting on our behalf. On
March 14, 2006, the action against the receiver was dismissed at the outset for
failure to show cause of action and the action is continuing, therefore, only
against us and the land-owner.

     (K) In May 2006, a suit was filed in the Rehovot Magistrates Court, against
us, the receiver that was appointed at our request in respect of a carpentry
workshop and the purchaser of the workshop from the receiver. According to the
statement of claim filed by the former owners of the workshop for an amount of
NIS 2.5 million, we and the receiver agreed with the acquirer of the workshop on
a purchase price lower than the amount that he originally undertook to pay the
plaintiffs. The plaintiffs also claim that we and the receiver did not insure
the premises and equipment of the workshop and, therefore, we are liable for the
damages that occurred to the premises and the equipment as a result of a fire
that broke out at the workshop. The handling of the suit was transferred to an
attorney on our behalf.

     In addition, we are party to various pending legal proceedings which we do
not expect will have a material adverse effect on our business, financial
condition or results of operations.

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DIVIDEND POLICY

     In the past, we paid an annual dividend on Ordinary A Shares, Preferred
Ordinary Shares, Ordinary B Shares and Ordinary B1 Shares, as well as on our
Preferred Shares. The Ordinary B Shares and Ordinary B1 Shares are held by the
State of Israel. We stopped paying dividends on these shares at the same time
that we stopped paying dividends on our Preferred Shares. For a discussion
regarding the cessation of the payment of dividends, see "Item 3. Key
Information-Risk Factors" above and "Item 13. Defaults, Dividend Arrearages and
Delinquencies" below.

B.   SIGNIFICANT CHANGES

     No significant changes have occurred since the date of the annual financial
statements included in this Annual Report on Form 20-F.

ITEM 9. THE OFFER AND LISTING

A.   OFFER AND LISTING DETAILS

PRICE HISTORY OF LISTED STOCK

     Our Ordinary Preferred Shares, and our C Shares, CC Shares and CC1 Shares
are listed on the Tel Aviv Stock Exchange. The following table shows the high
and low closing price in NIS for our Ordinary Preferred Shares, and our C
Shares, CC Shares and CC1 Shares on the Tel Aviv Stock Exchange for the periods
indicated:

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                                                       IN  NIS
                    ------------------------------------------------------------------------------------
                  CLASS C CUMULATIVE CLASS CC CUMULATIVE     CLASS CC1 CUMULATIVE
                    PARTICIPATING      PARTICIPATING            PARTICIPATING         PREFERRED ORDINARY
                 PREFERENCE SHARES   PREFERENCE SHARES        PREFERENCE SHARES             SHARES
                    --------------    -----------------       -----------------       ------------------
                    HIGH      LOW     HIGH         LOW        HIGH         LOW        HIGH          LOW
                    ----      ----    -----       -----       -----       -----       -----         ----

2002                490        58     4,750         752       4,840         555       2,870         150
2003                123        58     1,142         700         990         550         229         143
2004                158        95     1,590       1,000       1,449       1,001       1,174         194
2005
   1st Quarter      169       115     1,400       1,200       1,500       1,198       1,058         711
   2nd Quarter      145       120     1,300       1,134       1,300       1,200         895         808
   3rd Quarter      135       122     1,181       1,134       1,200       1,142         890         578
   4th Quarter      111       107     1,200         960       1,123       1,089         688         580
2006
   1st Quarter      126        94     1,225       1,008       1,159         873         572         490
   2nd Quarter      193       142     1,885       1,339       1,977       1,386         525         390
   3rd Quarter      201       179     1,981       1,582       1,852       1,784         383         315
   4th Quarter      227       196     2,308       1,907       2,040       1,995         538         424
2007
   January          259       221     1,998       1,916       2,042       1,810         534         450
   February         221       190     2,400       2,121       1,720       1,810         537         516
   March            234       183     2,300       1,910       2,140       1,720         714         509
   April            250       207     2,300       2,300       2,000       2,000         790         655
   May              230       230     2,300       2,300       2,100       2,000         906         770
   June             279       230     2,379       2,300       2,100       2,000       2,095         770

     Neither our D Shares nor our DD Shares, are listed or traded on the Tel
Aviv Stock Exchange. None of our securities are listed or traded on any stock
exchange in the United States.

B.   PLAN OF DISTRIBUTION

     Not applicable.

C.   MARKETS

     Our listed securities are traded only on the Tel Aviv Stock Exchange.

D.   SELLING SHAREHOLDERS

     Not applicable.

E.   DILUTION

     Not applicable.

F.   EXPENSES OF THE ISSUE

     Not applicable.

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ITEM 10. ADDITIONAL INFORMATION

A.   SHARE CAPITAL

     Not applicable.

B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION

     Under the Companies Law, a company may define its purposes as to engage in
any lawful business. Section 2 of our Memorandum of Association, which outlines
our objects and purposes, states that we may undertake the following activities,
among others:

(a)  establish a financial institution to be instrumental in the encouragement
     of, and assistance to, the creation and expansion of efficient, useful and
     economically sound enterprises in Israel;

(b)  grant and provide banking services of any kind or nature;

(c)  grant credits of any kind or nature whatsoever, financial and any other
     assistance to any person in Israel and outside Israel, in such a manner and
     way and on such terms as we may deem proper and fit;

(d)  deal in investment, underwrite, acquire and hold securities issued or made
     by any company in Israel or abroad;

(e)  promote, further and encourage the issue of securities by industrial and
     other enterprises and promote and further the investment and participation
     of capital in industrial and other enterprises whatsoever;

(f)  promote and assist in the creation and issuance of securities of all kinds;

(g)  lend money and provide credit to any enterprises;

(h)  guarantee loans obtained or to be obtained by any industrial and other
     enterprise; and

(i)  borrow and raise money and secure the repayment thereof in the manner and
     on the terms as we may deem advisable.

ARTICLES OF ASSOCIATION

     AMENDMENT OF ARTICLES OF ASSOCIATION. Under the Companies Law, a company
incorporated before the Companies Law went into effect (February 1, 2000) may
modify or amend its articles of association by a resolution adopted by either
75% of the shareholders at a general meeting participating in the vote and
excluding abstainees, or by a different percentage if so provided in the
company's memorandum and articles of association. We were incorporated in 1957;
our memorandum and articles of association do not prescribe any percentage for
amendment of our Articles of Association and so we may amend the Articles with
the approval of 75% of the shareholders.

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     The Companies Law further provides that any amendment to the articles of
association of a company that obligates a shareholder to acquire additional
shares or to increase the extent of his liability shall not be effective against
the shareholder without his prior consent.

     RECORD DATE FOR NOTICES OF GENERAL MEETING AND OTHER ACTION. Under the
Companies Law and relevant regulations, for the purpose of a shareholder vote,
the record date for public companies, defined as companies traded on an exchange
or companies whose shares were offered to the public by prospectus and are held
by the public, such as us, can be set between four and twenty-one days before
the date of the meeting. However, for certain subjects which, pursuant to the
Companies Law, can be voted on by ballot, the record date shall be no more than
40 days and no less than 28 days before the date of the meeting.

     NOTICE OF GENERAL MEETINGS; OMISSION TO GIVE NOTICE. The Companies Law and
regulations thereunder provide that a public company, such as us, must give
notice of a general meeting to its shareholders of record at least twenty-one
days prior to the meeting, unless the company's articles of association provide
that a notice need not be sent. However if the agenda of the meeting includes
specific subjects which can be voted on by ballot, the notice must be given at
least thirty-five days prior to the meeting. Article 5 of our Articles of
Association provide that only the holders of Ordinary A Shares and Ordinary
Preferred Shares, will be entitled to receive notice of a general meeting and
that the holders of all other classes of shares will not enjoy such right.

     ANNUAL MEETINGS AND EXTRAORDINARY MEETINGS. Under the Companies Law, an
annual meeting of the shareholders should be held once in every calendar year
and not more than fifteen months from the last annual meeting. The Companies Law
provides that an extraordinary meeting of shareholders of a public company, such
as us, must be called by the board of directors upon the written request of (i)
two directors, (ii) one-fourth of the serving directors, (iii) one or more
shareholders who hold at least five percent of the issued share capital and at
least one percent of the voting rights of the company, or (iv) one or more
shareholders who have at least five percent of the voting rights of the company.
Within twenty-one days of receipt of such demand, the board of directors is
required to convene the extraordinary meeting for a time not later than
thirty-five days after notice has been given to the shareholders (unless
otherwise provided regarding a meeting having on its agenda a subject which can
be voted on by ballot). Article 58 of our Articles of Association provides that
our Board of Directors may call an extraordinary meeting at any time it sees
fit. In addition, Article 61 of our Articles of Association provides that our
Board of Directors shall convene an extraordinary meeting upon the written
request of a holder or holders of not less than 1/10 of our paid up capital that
carries with it voting rights at general meetings of shareholders.

     QUORUM AT GENERAL MEETINGS. Under Article 65 of our Articles of
Association, the required quorum for any general meeting of shareholders is two
or more shareholders present in person, by proxy or by attorney, who
collectively hold Ordinary A Shares representing at least thirty-three and
one-third percent (33(1)/3%) of the number of votes of the Company. Article 68
of our Articles of Association provides that if a quorom is not present within
half an hour from the time the meeting was set, then, if the meeting was called
at the request of the shareholders it will be cancelled; otherwise, it will be
adjourned and any shareholders present and entitled to participate in the
adjourned meeting shall constitute the required quorom.

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     ADOPTION OF RESOLUTIONS AT GENERAL MEETINGS. The Companies Law (as applied
to public companies, such as us) and Article 71 of our Articles of Association
provide for voting by poll only. In addition, the Companies Law provides that a
declaration by the chairman of the meeting that a resolution has been carried or
rejected, unanimously or by a particular majority, shall be prima facie evidence
of the fact.

     VOTING POWER; MODIFICATION OF CLASS RIGHTS. Article 77 of our Articles of
Association provides that every shareholder shall have one thousand votes for
each Ordinary A Share held by him and one vote for every Preferred Ordinary
Share held by him. Article 8 of our Articles of Association provides that if at
any time our share capital is divided into different classes of shares, the
rights attached to any class may be modified, abrogated or otherwise dealt with
by the company with the consent in writing of the holders of 75% of the issued
and outstanding shares of that class or by Special Resolution (a resolution
carried by at least 75% of the votes of those present and voting) in an
extraordinary meeting of the shareholders of that class. A shareholder may vote
in person, by proxy, by a duly authorized representative, or, regarding specific
subjects, by ballot.

     BALLOTS. Under the Companies Law and relevant regulations, a shareholder of
a public company, such as us, may vote by ballot, regarding the following
matters:

     (1)  the appointment and discharge of directors;

     (2)  approval of acts and transactions that require approval by the general
          meeting of shareholders pursuant to the provisions of sections 255 and
          268 through 275 of the Companies Law;

     (3)  approval of a merger pursuant to section 320 of the Companies Law;

     (4)  any other subject in respect of which it is provided in the by-laws or
          pursuant to them that decisions of the general meeting of shareholders
          also be adopted by voting by ballot;

     (5)  approval of a settlement or compromise between the company and its
          shareholders or creditors.

     ELECTION AND REMOVAL OF DIRECTORS. Under our Articles of Association, our
Board of Directors shall consist of not less than seven and not more than
fifteen directors. The appointment of our directors and their removal (except
for the "additional director" who is appointed by the other members of the Board
of Directors and who by virtue of his appointment becomes the Chairman of the
Board) shall be effected by the holders of our Ordinary A Shares.

     Our Articles provide that each shareholder or group of shareholders shall
be entitled to appoint one director for every 1,015 Ordinary A Shares held. The
appointer(s) of a director may at any time remove the director appointed by him
(them).

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     Under our Articles of Association, a director is not required to retire at
a certain age and need not hold our shares. Under the Companies Law, a person
cannot serve as a director if convicted of certain offenses or been declared
bankrupt. In the event the appointer of a director shall cease to hold the
requisite number of Ordinary A Shares, the director appointed by him shall cease
to be a director according to Article 88 of our Articles of Association.

     QUALIFICATION OF DIRECTORS. Articles 96 and 97 of our Articles of
Association provide that no person shall be disqualified from serving as a
director by reason of not holding shares in the Company or by reason of having
served as director in the past. Our directors are not subject under the
Companies Law or our Articles of Association to an age limit requirement. Under
the Companies Law and in accordance with Article 100 of our Articles of
Association, a person cannot serve as a director if he or she has been convicted
of certain offenses, unless specifically authorized by the court, or if he or
she has been declared bankrupt. We implement both the directive of the
Securities Authority regarding directors having accounting and financial skills
as instructed by the Bank of Israel and the provisions of the Companies Law with
respect to directors having accounting and financial expertise.

     CHAIRMAN OF THE BOARD OF DIRECTORS. The Board of Directors may from time to
time appoint one additional director to serve as Chairman of the Board of
Directors in accordance with Article 89A of our Articles of Association.
Alternatively, the Board of Directors may, in accordance with Article 112 of our
Articles of Association, elect one of its members to serve as the Chairman of
the Board.

     CONFLICTS OF INTEREST. The Companies Law provides that a director, as well
as an officer, shall refrain from any act that creates a conflict of interest
between the performance of his function in the company and his performance of
any other function or his personal affairs. The Companies Law further provides
that if a director has a personal interest in the approval of a transaction
(other than a transaction that is not deemed to be extraordinary and does not
relate to the director's terms of service or his employment in other
assignments) brought for approval before a company's audit committee or the
board of directors, then such director must not be present at the discussion and
must not participate in the vote in the audit committee and at the board of
directors.

     DIRECTOR REMUNERATION. The Companies Law provides that director
remuneration must be approved by the Audit Committee, the Board of Directors and
by the shareholders in their general meeting.

     PROCEEDINGS OF THE BOARD OF DIRECTORS. Article 106 of our Articles of
Association provides that the Board of Directors may meet and adjourn its
meetings and otherwise regulate such meetings and proceedings as the directors
think fit. A meeting of directors may be called on three days' notice according
to Article 110 of our Articles of Association.

     Article 107 of our Articles of Association provides that 1/3 of the
directors then in office shall constitute a quorum for meetings of the Board of
Directors. No business shall be transacted at a meeting of the Board of
Directors unless the requisite quorum is present. At a twice adjourned meeting
(due to lack of the requisite quorom), two directors shall constitute a quorum
according to Article 107 of our Articles of Association.

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     Except as provided in the next sentence, all questions arising at any
meeting of our Board of Directors shall be decided by a majority of votes, and,
in the case of equal votes for and against, the Chairman of the Board of
Directors shall be granted one additional vote in accordance with Article 113.
Article 114 provides that the consent of a special majority (consisting of the
consent of (a) a majority of the then serving directors and (b) at least half of
the directors appointed by the State of Israel) is required for the election of
a Chairman or Vice Chairman of the Board of Directors, for the appointment (in
accordance with Article 89A) of an additional director (who upon his appointment
becomes Chairman) or for the appointment (in accordance with Article 122) of a
managing director.

     BORROWING POWERS. The Companies Law authorizes the Board of Directors of a
company, among other things, to determine the credit limit of the company and to
issue bonds. Articles 51 and 52 of our Articles of Association state that our
Board of Directors may, from time to time, at its discretion, cause us to borrow
money and secure the payment of any sum or sums of money, and may secure or
provide for the repayment of such sum in such manner and upon such terms and
conditions as it deems fit.

     TRANSFER OF SHARES. Article 37 of our Articles of Association provides that
no Ordinary A Shares may be transferred without the consent of the Board of
Directors.

     ACQUISITION OF SHARES OVER CERTAIN THRESHOLDS. The Companies Law provides
that, subject to the provisions stipulated therein, an acquisition of shares of
a company such as ours must be made by means of a tender offer, if, as a result
of the acquisition, the purchaser would become a holder of twenty-five percent
or more of the voting rights. This rule does not apply if there is already
another holder of twenty-five percent of the voting rights. In addition, the
Companies Law provides that an acquisition of shares of a company such as ours
must be made by means of a tender offer, if, as a result of the acquisition, the
purchaser would become a holder of more than forty-five percent of the voting
rights, unless there is another person holding at that time, forty-five percent
of the voting rights.

     Regulations under the Companies Law provide that the Companies Law's tender
offer rules do not apply to a company whose shares are publicly traded either
outside of Israel or both in and outside of Israel if, pursuant to the
applicable foreign securities laws and stock exchange rules, there is a
restriction on the acquisition of any level of control of the company or if the
acquisition of any level of control of the company requires the purchaser to
make a tender offer to the public shareholders.

     REPURCHASE OF SHARES. The Companies Law, subject to certain limitations,
allows companies under certain circumstances to repurchase their own shares.

     FOREIGN OWNERSHIP. Neither our Articles of Association nor Israeli law
restrict in any way the ownership of our shares by nonresidents of Israel, or
restrict the voting or other rights of nonresidents of Israel. Notwithstanding,
nationals or residents of countries that are in a state of war with Israel or
entities incorporated, established or managed of such countries may not transfer
and/or acquire ownership of shares in Israel, and/or receive dividends in
respect thereto, without a special government permit.

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     MERGERS. The Companies Law provides for mergers between Israeli companies,
if each party to the transaction obtains the appropriate approval of its board
of directors and (subject to certain exceptions) also the approval of the
shareholders in their general meeting. A "merger" is defined in the Companies
Law as a transfer of all assets and liabilities (including conditional, future,
known and unknown liabilities) of a target company to another company, the
consequence of which is the dissolution of the target company in accordance with
the provisions of the Companies Law. For purposes of the approval at the general
meeting of shareholders of each merging entity, unless a court rules otherwise,
the merger will not be deemed approved, if the shareholders who hold the
majority of the voting rights among the participants in the vote (excluding
abstainers) that are not held by the other merging entity or by any person who
holds 25% or more of the voting rights or the right to appoint 25% or more of
the directors of the other entity had objected to the merger. The Companies Law
further provides that with respect to companies incorporated prior to the
commencement of the Companies Law (such as us), the merger requires the approval
of a majority of three-quarters of the voting members present at the general
meeting of shareholders (excluding abstainers).

     DISTRIBUTION OF DIVIDENDS AND LIQUIDATION RIGHTS. Article 130 of our
Articles of Association provides that if we have sufficient profits, the Board
of Directors, (a) must recommend that dividends be paid to the holders of the C
Shares, CC Shares, and CC1 Shares, the holders of D Shares and DD Shares and the
holders of Ordinary Preferred Shares; and (b) may recommend the payment of any
other dividend that is payable on our share capital under our Articles of
Association, provided that if the payment of fixed cumulative preferred
dividends on our Preferred Shares or our Ordinary Preferred Shares, is in
arrears, the Board of Directors must recommend first the payment of the
arrearage. In the event of the winding up of our business, after satisfaction of
liabilities to creditors, our assets will be distributed in accordance with
Article 7 of our Articles of Association.

     Generally, pursuant to the Companies Law, the decision to distribute
dividends and the amount to be distributed, whether interim or final, is made by
the board of directors, subject to any other provision in the company's articles
of association.

     Under the Companies Law, dividends may be paid by a company only out of its
balance of net profits or out of its net profits for the two years preceding the
distribution of the dividends, whichever is greater, calculated in the manner
prescribed in the Companies Law. Pursuant to the Companies Law, any distribution
of dividends is subject to the proviso that there is no reasonable concern that
the distribution of dividends will prevent the company from meeting its existing
and foreseeable obligations as they become due. Article 133 of our Articles of
Association provides that no dividends shall be paid other than out of our
profits and that any such dividend shall carry no interest.

     INTERESTED PARTIES TRANSACTIONS. The Companies Law requires that certain
transactions, actions and arrangements be approved by a company's audit
committee as well as by its board of directors. In certain circumstances, in
addition to audit committee and board of directors' approval, approval by the
shareholders at their general meeting is required. In the case of our Company,
the approval of our Audit Committee, Board of Directors and shareholders is
required with respect to the following:

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     (1) a director's terms of service and employment, including, among other
things, grant of exemptions, insurance and indemnification;

     (2) extraordinary transactions (as defined in the Companies Law) with (i) a
controlling shareholder or his relative, or (ii) another person or entity in
which transaction a controlling shareholder has a personal interest, including a
private placement that is an extraordinary transaction; and

     (3) the terms of engagement or employment with a controlling shareholder,
or his relative, who is also an office holder (including a director) or an
employee of the Company.

     The approval of our shareholders would be required in addition to the
approval of our Board of Directors, in (i) any transaction in which the majority
of our directors have a personal interest, and (ii) a private placement of
securities that will increase the holdings in our securities of a shareholder
that holds five percent or more of our outstanding share capital or our voting
rights or that will cause any person to become, as a result of the issuance, a
holder of five percent or more of our outstanding share capital or our voting
rights, if such privately placed securities grant the acquirer(s) twenty percent
or more of the total voting rights in our Company prior to its issuance, and the
consideration for it is neither in cash nor in securities registered for trading
on a stock exchange or is not at the market terms; and (iii) a private placement
of securities that will cause any person to become the controlling shareholder
in the Bank.

     For the purpose of approvals of interested parties transactions, a
"controlling shareholder" is defined under the Companies Law as: (i) a
shareholder having the ability to direct the acts of the company, excluding such
ability that stems only from serving as a director or holding another office in
the company (for this purpose, any person holding one half or more of the voting
rights of the company or of the right to appoint one half or more of the
directors of the company or the right to appoint the General Manager of the
company, is presumed to have control of the company); or (ii) the holder of
twenty five percent or more of the voting rights at the general meeting of
shareholders, if there is no other person holding more than fifty percent of
such rights (for this purpose, two or more holders having a personal interest in
the same transaction shall be deemed to be joint holders).

     The Companies Law requires a special majority of shareholder votes in
approving the transactions with a controlling shareholder referenced in
paragraphs (2) and (3) above. The special majority approval must comply with one
of the following: (a) it must include at least one-third of all of the votes of
the shareholders (excluding absentees) voting at the meeting who do not have a
personal interest in the transaction, or (b) the total number of opposing votes
from amongst the shareholders who do not have a personal interest in the
transaction does not exceed one percent of all of our voting power rights

     The disclosure provisions of the Companies Law require certain disclosure
to be made to us in connection with interested parties transactions, as follows:

     o an office holder (including a director) or a controlling shareholder must
promptly disclose any direct or indirect personal interest (excluding personal
interest that stems only from the personal interest of a relative and where the
transaction is not extraordinary) that such person may have, and all material,
related information or documents, in connection with any existing or proposed
transaction by us;

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     o in the event of a private placement of securities that will increase the
holdings in our securities of a shareholder that holds five percent or more of
our outstanding share capital or our voting rights or that will cause any person
to become, as a result of the issuance, a holder of five percent or more of our
outstanding share capital or our voting rights, if such privately placed
securities grant the acquirer(s) twenty percent or more of the total voting
rights in our Company prior to its issuance, and the consideration for it is
neither in cash nor in securities registered for trading on a stock exchange or
is not at the market terms; and (ii) that will cause any person to become, as a
result of the issuance, a controlling shareholder, such shareholder or person
must promptly disclose to us any personal interest he or she may have in such
private placement, including all material, related information or documents; and

     o any of our shareholders voting on any transaction concerning a
controlling shareholder as set forth above must inform us prior to the vote, or
on the proxy card, if applicable, of any personal interest such person has in
the transaction. The vote of a shareholder who does not inform us with respect
to any such interest shall not be counted.

     In addition, a director who has a personal interest in a transaction
(whether with him or with another person), except a transaction that is not
exceptional, may not be present or vote at a meeting of the Audit Committee or
the Board of Directors, unless a majority of directors in the Audit Committee or
the Board of Directors, as applicable, have a personal interest in the
transaction.

     EXEMPTION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS. The
Companies Law describes the fiduciary duty of an office holder (including a
director) as a duty to act in good faith and for the benefit of the company,
including by refraining from actions in which he or she has a conflict of
interest or that compete with the company's business, refraining from exploiting
a business opportunity of the company in order to gain a benefit for such person
or for another person, and disclosing to the company any information and
documents which are relevant to the company and that were obtained by such
person in his or her capacity as an office holder. The Companies Law provides
that an office holder (including a director) owes a duty of care to the company,
that requires the office holder, among other things, to act at a level of
competence at which a reasonable office holder would have acted in the same
position and under the same circumstances, including by adopting reasonable
means for obtaining information concerning the profitability of the act brought
for his approval or performed by such person in the scope of his or her office.

     Under the Companies Law, a company may not exempt an office holder
(including a director) from liability with respect to a breach of his fiduciary
duty, but may exempt in advance an office holder from his or her liability to
the company, in whole or in part, with respect to a breach of his duty of care,
except with respect to a distribution.

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     Pursuant to the Companies Law, a company may indemnify an office holder
(including a director) against a monetary liability imposed on him by a court,
including in settlement or arbitration proceedings that were approved by a
court. Indemnification may cover reasonable litigation costs, including
attorneys' fees, incurred due to an investigation or a proceeding by a competent
authority to perform such investigation or proceeding, and which terminated
without the filing of an indictment and without a monetary liability in place of
a criminal proceeding, or which terminated without the filing of an indictment
but with a monetary liability in place of a criminal proceeding for an offense
which does not require proof of criminal intent and reasonable litigation
expenses, including attorneys' fees, incurred in a civil proceeding or in a
criminal proceeding in which the office holder was found to be innocent or in
which he was convicted of an offense which does not require proof of a criminal
intent. The indemnification of an office holder must be expressly allowed in the
articles of association, under which the company may (i) undertake in advance to
indemnify its office holders (including directors) with respect to events that
in the board of director's opinion can be foreseen, in view of the actual
activity of the company, at the time of giving such undertaking and up to an
amount or specific criterion determined by the board of directors to be
reasonable under the circumstances, which events and which amount or criterion
are to be stipulated in the company's undertaking and with respect to expenses
as specified above; or (ii) provide indemnification retroactively.

     Pursuant to the Companies Law, a company may also procure insurance of an
office holder's (including a director's) liability for acts performed by him in
the scope of his office, in the following cases: (a) a breach of the duty of
care of such office holder, (b) a breach of the fiduciary duty, provided the
office holder acted in good faith and had reasonable grounds to believe that
such act would not be detrimental to the company, or (c) a monetary liability
imposed on the office holder for the benefit of another person.

     A company may not indemnify an office holder (including a director)
against, nor enter into an insurance contract which would provide an office
holder (including a director) coverage for, nor exempt an office holder
(including a director) from:

     o    a breach by the office holder of his fiduciary duty, except with
          respect to indemnification against and insurance for a breach of
          fiduciary duty where the office holder acted in good faith and had a
          reasonable basis to believe that the act would not be detrimental to
          the company;

     o    a breach by the office holder of his duty of care if such breach was
          done intentionally or recklessly, except in the case of negligence;

     o    any act or omission done with the intent to derive an illegal personal
          gain; or

     o    any fine or penalty levied against the office holder as a result of a
          criminal offense.

     In addition, under the Companies Law, exemption from, indemnification of,
and procurement of insurance coverage for a company's officers must be approved
by the company's audit committee and board of directors, and, with regard to
directors, also by the company's shareholders.

     The provisions of the Companies Law described above include certain
amendments enacted during 2005. Our Articles of Association allow us to exempt
officers and directors, to indemnify them and to procure insurance for them, in
accordance with the provisions of the Companies Law, as enacted prior to the
above amendments, but require the additional approval of our shareholders even
with regard to exemption and undertaking to indemnify to be granted to our
office holders who are not directors.

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C.   MATERIAL CONTRACTS

     The following is a summary of each material contract, other than contracts
entered into in the ordinary course of business and other than the Run-Off Plan
and the special line of credit (which are described in "Item 4. Information on
the Company - Business Overview - Proposed Sale of the Bank and Extension of
Special Line of Credit by Bank of Israel" and "Adoption of Run-Off Plan and
Amendment of the Special Line of Credit" above), and the indemnification
agreement for directors and senior officers (which is described in "Item 6.
Directors, Senior Management and Employees - Compensation") to which we are a
party, for the two years preceding publication of this Annual Report on Form
20-F.

     o Lease Agreement - On June 26, 2003, we signed a lease for new offices,
located at 82 Menachem Begin Road, Tel Aviv, Israel 67138. We lease
approximately 12,000 square feet, plus parking spaces and additional storage
space. In 2006, we exercised an option to extend the lease until August 31,
2009. We pay rent of approximately $12,000 per month for office space and
approximately $4,400 more per month for parking and storage space. In addition,
we pay maintenance, municipal property tax and other related expenses.

     o Perpetual Deposit Agreement - Pursuant to agreements (by way of exchange
of letters) that were entered into at various times between us and the Israeli
Treasury, we deposited with the Israeli Treasury the capital from the offerings
of our Preferred Shares (C Shares, CC Shares, CC1 Shares, D Shares and DD
Shares). The total principal amount of these deposits with the Treasury was NIS
825.8 million, as of December 31, 2006, as compared with NIS 828.2 million, as
of December 31, 2005. Pursuant to these agreements, we are entitled, regarding
the amounts so deposited, to receive dollar-interest at the annual rate of 7.5%
of the dollar value of the deposits (as of the date of their deposit), which
will be paid net to us by the Treasury, on the dates that we will declare the
payment of a dividend for the Preferred Shares, in such manner that after the
payment of taxes and other charges, the net amount of interest that we receive
from the Treasury will be at the above rate of 7.5%.

     The deposit agreements do not expressly stipulate how the interest on the
perpetual deposits should be handled during periods in which the Bank is
prevented from distributing dividends on these Preferred Shares, and whether the
interest will accrue and be paid when the Bank pays the accrued preferred
dividends in arrears or upon liquidation. See Note 15 to our financial
statements in Item 17 of this Annual Report on Form 20-F for details on the
cessation of dividend distribution and the matter of the accrued interest on the
perpetual deposits with the Israeli Treasury.

     The principal amounts that we so deposited will be returned to us by the
Israeli Treasury only upon our liquidation or for the purpose of redemption of D
Shares and DD Shares (which were offered as redeemable shares), with the
principal amounts being linked to the U.S. dollar from the date of their deposit
with the Treasury and until October 1987, and linked to the higher of the CPI or
the U.S. dollar, from October 1, 1987 until the date of repayment. The deposit
agreements establish that the Treasury shall not have a right of set-off as to
amounts that we will receive regarding the deposits thereby deposited.

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     o Computer Outsourcing Agreement - Pursuant to an agreement dated December
23, 2003 between us and NESS A.T. Ltd. ("NESS"), NESS has undertaken to provide
us with IT outsourcing services, including ongoing management and operation of
our information systems, maintenance and operation of hardware, computers,
peripheral equipment, communications and software infrastructure (I.E.
databases, operations systems, etc.), application operation and maintenance,
modification and adaptation of our applications, information security services
etc.

     The agreement was for an initial period of three years beginning from
January 1, 2004 and during 2006 we extended it for an additional two years. We
are entitled to terminate the agreement by a prior notice of four months. In
2006, the cost of the service was NIS 2.4 million. In 2007 and 2008, the cost of
the service will amount to NIS 2.3 million each year. Half of the above service
cost amounts is linked to the Israeli CPI and half is linked to the exchange
rate of the U.S. dollar.

     During the term of the agreement, we are entitled to order from NESS
modifications to our information systems and/or development of new applications
and for such purpose, we have available to us a "bank of hours".

     o Special Collective Agreement With Employees - On December 26, 2002, a
collective agreement was signed between us, the General Federation of Labor and
our employee committee, which applies to those of our workers to which
collective agreements apply (and not to those with personal employment
contracts). The collective agreement was signed for a three-year period, with a
possible extension for an additional year. The collective agreement established,
among other things: (1) the right of management to terminate the employment of
employees within the framework of the reduction of our banking services, as well
as the termination procedure; (2) the special benefits and payments to which an
employee is entitled if his employment is terminated, including additional
severance payments beyond those set by law and the conversion of the right to
additional severance (for employees with particular seniority and with a
particular number of years until their reaching retirement age) into early
old-age pension rights; and (3) certain reductions to be made in the salaries of
the employees and the related benefits to which they are entitled.

     On March 14, 2005, the parties signed a new collective agreement which
extended the term of the prior collective agreement until the termination date
of our Run-Off Plan (including any modification or extension to the Plan
approved by the Government) or until December 31, 2007, whichever is first. This
new agreement also established and clarified that employees who under the
original agreement were entitled to an early old-age pension due to the
termination of their employment, will be entitled to the pension until they
reach the age from which they will be entitled to receive a regular old-age
pension from the pension fund in which they are members. This certification was
required in light of the reform in the pension field which took place after
after the signing of the original agreement. The new collective agreement also
established that some of the limited-time concessions to which the employees
agreed in the original agreement will continue to apply during the term of the
new agreement.

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     On July 12, 2006, an additional collective agreement (the "Second Extension
Agreement") was signed between the aforementioned parties, extending once again
the aforementioned collective agreement until July 31, 2008 (the date on which
the Run-Off Plan is to conclude). The Second Extension Agreement also stipulates
that if the Run-Off Plan is extended beyond July 31, 2008, the collective
agreement will also be extended until such date, but not beyond December 31,
2008.

     We have recorded appropriate provisions in our financial statements in
respect of these collective agreements. These agreements were approved by the
Commissioner of Wages and Labor Agreements in the Ministry of Finance.

     The waivers and part of the benefits which were set out in the
aforementioned collective agreements will also apply to some of our employees
who are employed under personal contracts.

     o The Kibbutzim Debt Agreement - Following the difficulties experienced by
the kibbutzim in Israel and the organizations affiliated with them during the
1980's, several agreements were entered into over the course of 1989 and 1999
among the kibbutzim, their bank creditors and the State of Israel.

     The purpose of these agreements was to reorganize the debt of the kibbutzim
and the organizations affiliated with them and to conform it to their actual
repayment ability. The agreements include a detailed and complex apparatus to
handle these debts. Within this framework, it was established that the kibbutzim
that were defined as requiring assistance shall be entitled to refunds of
certain interest differentials for unpaid credit which they were granted by the
banks who were parties to the agreement, to a waiver of part of these credits
and to long-term rescheduling of the remainder.

     The Government financed 35% of the waivers and deposited funds with the
banks to serve as a source for the rescheduling. Kibbutzim that were defined as
owners of real estate with potential for development, were required pursuant to
these agreements to assign their rights in the land in consideration for a
portion of the waivers that were approved for them.

     See Note 4 to our financial statements in Item 17 of this Annual Report on
Form 20-F for further details of the Kibbutzim debt agreement.

     o Credit to the Israel Electric Corporation Ltd. - Pursuant to a series of
agreements entered into at various times during the 1990's, we granted long-term
credits to the Israel Electric Corporation Ltd. in a total amount of
approximately 1.5 billion U.S. dollars and with final payment dates falling due
in the years 2020-2025. These credits were granted from deposits which were
deposited with us by the State of Israel, in identical amounts and having
identical maturity dates as the credits. These credits are fully guaranteed
(principal and interest) by the State of Israel. The outstanding balance of
these credits as of December 31, 2006 was approximately 1.35 billion U.S.
dollars, comprising approximately 87% of the total credit to the public at that
date.

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D.   EXCHANGE CONTROLS

     There are no Israeli government laws, decrees or regulations that restrict
or affect our export or import of capital or the remittance of dividends,
interest or other payments to non-resident holders of our securities, including
the availability of cash and cash equivalents for use by us, except or otherwise
as set forth under "Item 10.Additional Information - Memorandum and Articles of
Association - Foreign Ownership" above, and under "Taxation" below.

E.   TAXATION

ISRAELI TAXATION

     The following is general information regarding Israeli tax laws to which
U.S. and other non-Israeli shareholders may be subject. It does not cover all
possible tax considerations and therefore you should not rely on this
information as legal or professional tax advice. You should consult your own tax
advisor as to the particular tax consequences of an investment in our shares and
notes including the effects of applicable Israeli or foreign or other tax laws
and possible changes in the tax laws. The discussion is based on Israeli tax
laws in force as of June 10, 2007.

     To the extent that the discussion is based on legislation yet to be
judicially or administratively interpreted, we cannot assure you that the views
we express herein will accord with any such interpretation in the future.

     Under current Israeli law, individual or corporate shareholders or
noteholders that are foreign residents and that do not maintain a permanent
establishment in Israel are exempt from capital gains tax on the sale (including
redemption) of traded securities of Israeli companies. Subject to the following
paragraph, upon the sale of unlisted securities, an individual shareholder or
noteholder is subject to a 20% tax rate, and a corporate shareholder or
noteholder is subject to a 25% tax, on any capital gain accrued after January 1,
2003.

     Foreign residents are exempt from tax on capital gains on the sale of
securities (traded or untraded) (provided the company does not hold rights in
Israeli real estate) acquired between July 1, 2005 and December 31, 2008 subject
to certain conditions, the principal ones being that: (a) the capital gain is
not attributable to a permanent establishment of the seller in Israel; (b) the
seller has been a resident of a country having a tax treaty with Israel for ten
years preceding the date of acquisition; and (c) the securities were not
purchased from a relative.

     Notwithstanding the foregoing, dealers in securities in Israel are taxed at
regular tax rates applicable to business income.

     Pursuant to the convention between the Government of the United States of
America and the Government of Israel with respect to taxes on income, which we
refer to as the treaty or the U.S.-Israel tax treaty, the sale, exchange or
disposition of our shares or notes by a person who qualifies as a resident of
the United States under the treaty and who is entitled to claim the benefits
afforded to him by the treaty, will generally not be subject to Israeli capital
gains tax. This exemption does not apply to the sale of shares by a person who
held, directly or indirectly, shares representing 10% or more of the voting
power in our company during any part of the 12-month period preceding the sale,
exchange or disposition, subject to certain conditions. A sale, exchange or
disposition of our shares by a U.S. resident qualified under the treaty, who
held, directly or indirectly, shares representing 10% or more of the voting
power in our company at any time during the preceding 12-month period would be
subject to Israeli tax, to the extent applicable; however, under the treaty,
this U.S. resident would be permitted to claim a credit for these taxes against
U.S. income tax due with respect to the sale, exchange or disposition, subject
to the limitations in U.S. laws applicable to foreign tax credits in accordance
with tax treaties.

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     Non-residents of Israel are subject to income tax on passive income accrued
or derived from sources in Israel, such as dividends, royalties and interest, as
well as non-passive income from services rendered in Israel.

     On distributions of dividends other than bonus shares (stock dividends) to
non-residents of Israel, we would generally withhold at source income tax at a
rate of 20%, unless a different rate applies under a treaty between Israel and
the shareholder's country of residence. Under the U.S.-Israel tax treaty, the
maximum tax on dividends paid to a holder of our shares who is a resident of the
United States will be 25% or 12.5% if certain conditions are met, including,
INTER ALIA, that the holder is a corporation which holds, directly or
indirectly, shares representing 10% or more of the voting power in our company
during any part of the 12-month period preceding the date of payment of the
dividend.

     On payments of interest on listed notes to non-residents of Israel, we
generally withhold at source income tax at a rate of 20% when the noteholder is
an individual, the note was issued on or after May 8, 2000 and certain further
conditions are met; at a rate of 35% when the noteholder is an individual and
the note was issued before May 8, 2000; and at a rate of 25% when the noteholder
is a corporation, in each case unless a different rate applies under a treaty
between Israel and the noteholder's country of residence. Under the U.S.-Israel
tax treaty, the maximum tax on interest paid to a noteholder who is a resident
of the United States will be 17.5%, or 10% if the interest is derived from a
loan granted by a bank, savings institution, or insurance company or the like.
Alternatively, the noteholder may elect under the treaty to pay tax at the full
rate on the net profit deriving from the interest payment although this is
generally subject to filing a tax return in Israel.

U.S. TAXATION

     The following is a summary of certain U.S. federal income tax consequences
applicable to the acquisition, ownership and disposition of our shares and notes
by a "U.S. Holder" (as defined below). This summary is based on the Internal
Revenue Code of 1986, as amended(the "Code"); Treasury Regulations; Internal
Revenue Service ("IRS") rulings; the U.S.-Israel tax treaty; and judicial
decisions, all as now in effect. All of these are subject to change, possibly
with retroactive effect, or different interpretations. For purposes of this
summary, "U.S. Holder" means the beneficial owner of a share or a note who or
that, for U.S. federal income tax purposes, is:

     o    a citizen or individual resident of the United States;

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     o    a corporation, partnership or other entity treated as such formed in
          or under the laws of the United States or any political subdivision of
          the United States;

     o    an estate the income of which is subject to U.S. federal income
          taxation regardless of its source; or

     o    a trust if a court within the United States is able to exercise
          primary supervision over the administration of such trust and one or
          more "U.S. persons" (within the meaning of the Code) have the
          authority to control all substantial decisions of the trust, or if a
          valid election is in effect to be treated as a U.S. person.

     This summary does not cover all aspects of U.S. federal income taxation
that may be relevant to particular U.S. Holders in light of their specific
circumstances (for example, U.S. Holders subject to the alternative minimum tax
provisions of the Code) or to investors that may be subject to special treatment
under U.S. federal income tax law, including:

     o    dealers in stocks, securities or currencies;

     o    securities traders that use a mark-to-market accounting method;

     o    banks and other financial institutions or financial services entities;

     o    insurance companies;

     o    tax-exempt organizations;

     o    qualified retirement plans;

     o    real estate investment trusts;

     o    regulated investment companies;

     o    persons holding our shares or notes as part of a hedging or conversion
          transaction or a straddle;

     o    persons who or that are not U.S. Holders;

     o    persons whose functional currency is not the U.S. dollar; and

     o    direct, indirect or constructive owners of 10% or more of our
          outstanding voting shares.

     The summary also does not discuss any aspect of state, local or foreign
law, or U.S. federal estate and gift tax law as applicable to U.S. Holders. In
addition, it is limited to U.S. Holders who or that acquire and hold our shares
or notes as "capital assets" within the meaning of the Code - generally,
property held for investment and, in the case of our notes, who or that acquired
notes in connection with their original issuance. This discussion also does not
consider the tax treatment of persons or partnerships who or that hold our
shares or notes through a partnership or other "pass-through" entity.

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     YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
OUR SHARES OR NOTES.

     A U.S. Holder generally will be required to include in gross income, as
ordinary dividend income, the amount of any distributions paid on our shares,
including the amount of any Israeli taxes withheld, to the extent that those
distributions are paid out of our current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of our
earnings and profits will be applied against and will reduce the U.S. Holder's
tax basis in our shares and, to the extent they exceed that tax basis, will be
treated as gain from a sale or exchange of those shares. Our dividends will not
qualify for the dividends-received deduction applicable in certain cases to
dividends received by U.S. corporations.

     In general, a U.S. Holder generally will be required to include in gross
income, as ordinary interest income, the amount of stated interest, including
the amount of any Israeli taxes withheld, on our notes as that interest is
received or accrued under that U.S. Holder's usual method of tax accounting.

     Dividends or interest paid in NIS, including the amount of any Israeli
taxes withheld, will be includible in the income of a U.S. Holder in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
they are received by the U.S. Holder. Any gain or loss resulting from currency
exchange fluctuations during the period from the date the dividend or interest
is includible in the income of the U.S. Holder to the date that payment is
converted into U.S. dollars will be treated as ordinary income or loss.

     Any dividends or interest we pay to a U.S. Holder with respect to our
shares or notes generally will be treated as foreign source income for U.S.
foreign tax credit purposes. Subject to the limitations set forth in the Code,
as modified by the treaty, U.S. Holders may elect to claim a foreign tax credit
against their U.S. federal tax liability for Israeli income tax withheld from
dividends or interest received in respect of our shares or notes. These
limitations include, among others, rules that limit foreign tax credits
allowable with respect to specific classes of income to the U.S. federal income
taxes otherwise payable with respect to each such class of income. The total
amount of foreign tax credits allowable to a U.S. Holder in any year cannot
exceed the regular U.S. tax liability for the year attributable to that U.S.
Holder's total foreign source taxable income (determined under the Code and, as
applicable, the U.S.-Israel tax treaty and other income tax conventions to which
the United States is a party). In certain cases, a U.S. Holder will be denied a
foreign tax credit with respect to Israeli income tax withheld from dividends
and interest received in respect of our shares and notes if the U.S. Holder has
not held those shares for a minimum period or to the extent the U.S. Holder is
under an obligation to make certain related payments with respect to
substantially similar or related property. U.S. Holders who or that do not elect
to claim a foreign tax credit may instead claim a deduction for Israeli income
tax withheld, but only for a tax year in which the U.S. Holder does the same
with respect to all foreign income taxes.

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     Upon a sale or other disposition of our shares or notes, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the disposition (less amounts attributable to accrued but
unpaid dividends or interest, if any, which will be taxed as dividends or
interest, respectively) and the holder's adjusted tax basis in the shares or
notes sold or otherwise disposed of. A U.S. Holder using the cash method of
accounting must calculate the U.S. dollar value of the proceeds received on the
sale date as of the date that the sale settles, while a U.S. Holder using the
accrual method of accounting is required to calculate the value of the proceeds
of the sale as of the "trade date," unless the U.S. Holder has elected to use
the settlement date to determine the proceeds of the sale. Gain or loss upon the
disposition of our shares or notes will be treated as long-term if, at the time
of the sale or disposition, the shares or notes disposed of were held for more
than one year. Long-term capital gains realized by individual U.S. Holders are
generally subject to a lower marginal U.S. federal income tax rate than ordinary
income. The deductibility of capital losses by a U.S. Holder is subject to
limitations.

     In general, any gain recognized by a U.S. Holder on the sale or other
disposition of our shares or notes will be U.S. source income for U.S. foreign
tax credit purposes. Pursuant to the treaty, however, gain from the sale or
other disposition of our shares by a holder who is a U.S. resident for treaty
purposes and who sells those shares within Israel may be treated as foreign
source income for U.S. foreign tax credit purposes. A loss on the sale or other
disposition of our shares may have to be allocated against foreign source income
for those purposes.

     Special U.S. federal income tax rules apply to U.S. Holders owning shares
of a so-called "passive foreign investment company," or "PFIC." A foreign
corporation will be considered a PFIC for any taxable year in which either 75%
or more of its gross income consists of certain types of passive income, or 50%
or more of the average value of its assets consists of assets that generate
those types of passive income. These tests are applied annually, but once
classified as a PFIC a foreign corporation remains one with respect to its U.S.
Holders except to the extent that those U.S. Holders are able to elect and elect
to purge their shares of that classification, with a possible tax cost. If we
were classified as a PFIC, a U.S. Holder could be subject to increased tax
liability, possibly including an interest charge, upon the sale or other
disposition of our shares or upon the receipt of amounts treated as "excess
distributions." Although several elections may be available to alleviate that
potential increased tax liability, there can be no assurance that the conditions
necessary for those elections to be made with respect to our shares will be
satisfied.

     A U.S. Holder of our shares or notes may be subject to "backup withholding"
with respect to certain "reportable payments," including dividend payments and,
under certain circumstances, proceeds from the sale or disposition of our shares
or notes. These backup withholding rules apply if the U.S. Holder, among other
things:

     o    fails to furnish a social security number or other taxpayer
          identification number (a "TIN") certified under penalty of perjury
          within a reasonable time after the request for the TIN;

     o    furnishes an incorrect TIN;

     o    fails to report properly interest or dividends; or

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     o    under certain circumstances, fails to provide a certified statement,
          signed under penalties of perjury, that the TIN furnished is the
          correct number and that the U.S. Holder is not subject to backup
          withholding.

     A U.S. Holder that does not provide us with its correct TIN also may be
subject to penalties imposed by the IRS. Any amount withheld from a payment to a
U.S. Holder under the backup withholding rules is creditable against the U.S.
Holder's federal income tax liability, provided that the required information is
furnished to the IRS. Backup withholding will not apply with respect to payments
made to certain U.S. Holders, including corporations and tax-exempt
organizations, provided their exemptions from backup withholding are properly
established. We are required to report to U.S. Holders and to the IRS the amount
of any "reportable payments" for each calendar year and the amount of tax
withheld, if any, with respect to these payments.

F.   DIVIDENDS AND PAYING AGENTS

     Not applicable.

G.   STATEMENT BY EXPERTS

     Not applicable.

H.   DOCUMENTS ON DISPLAY

     All documents referred to in this Annual Report on Form 20-F may be
inspected at our offices at 82 Menachem Begin Road, Tel Aviv, Israel. Any
reports and other information that we file electronically with the U.S.
Securities and Exchange Commission may be found at www.sec.gov. They can also be
inspected without charge and copied at prescribed rates at the public reference
facilities maintained by the Securities and Exchange Commission in Room 1580,
100 F Street, N.E., Washington, D.C. 20549.

I.   SUBSIDIARY INFORMATION

     Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FINANCIAL RISK

     Our policy for managing our assets and liabilities is designed to keep the
linkage base risks and interest risks within the exposure boundaries set by the
Board of Directors.

     A committee, which includes the General Manager and members of Management
and which usually meets on a weekly basis, deliberates implementation of this
policy. In accordance with the approval that was granted by the Supervisor of
Banks on November 26, 2003 this management committee functions as our financial
risk manager.

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     In 1997, the Bank of Israel published directives with respect to management
and control of financial risks, which we apply. With respect to the policies for
asset and liability management as well as management of financial risks, the
Board of Directors has set certain limitations. In addition, they also set the
manner and timing of reporting and control regarding compliance with the
limitations set. A report on the financial risk management is presented at the
meeting of the Board of Directors on a quarterly basis. The report includes an
updated exposure document, which makes reference to the limitations set, along
with amendments thereto in accordance with resolutions passed.

     Presented below are details of the main areas of exposure, the limitations
set therefore, and the manner and dates for reporting on the level of exposure
and compliance with the relevant limitations:

     LINKAGE BASE EXPOSURE - The exposure to linkage base risk is measured by
the difference between the assets and liabilities (including the effect of
forward transactions) for each linkage base.

     Similar to the entire banking system, the Bank has three main linkage
segments: CPI-linked, foreign currency denominated and linked, and unlinked
shekel. Linkage base exposure relates to the exposure to changes in the rate of
inflation as well as to changes in the exchange rate of the different
currencies.

     For each of the aforementioned linkage segments, maximum permissible
surplus and deficit levels have been set. These limitations were set on the
basis of the composition of our capital and our current activities.

     The limitations that were set by our Board of Directors on each of the
linkage segments are as follows:

     CPI-LINKED SEGMENT* - maximum surplus of NIS 500 million, maximum deficit
of NIS 50 million.

     UNLINKED SHEKEL SEGMENT - maximum surplus of NIS 100 million, maximum
deficit of NIS 550 million.

     FOREIGN CURRENCY DENOMINATED/LINKED - maximum surplus of NIS 50 million,
maximum deficit of NIS 25 million.

     *    In the CPI-linked segment the permissible surplus/deficit is net of
          our capital (including the preference shares classified as a liability
          for accounting purposes).

     The report on linkage base exposure is included in the report on our
activities, which is submitted to the Board of Directors. The aforesaid report
is also discussed by the management committee, which meets, as noted above, once
a week.

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     Beginning from the second half of 2002 there were significant changes in
the surplus/deficit of assets by linkage bases as a result of the withdrawal by
the public of its deposits with us. Since we had to resort to a credit line from
the Bank of Israel, and the credit line was granted to us only in unlinked
shekels, we execute transactions in derivatives in order to close the linkage
base exposures. These transactions are a part of our asset and liability
management.

     The following table presents details of the excess of assets over
liabilities (excess of liabilities over assets) classified by linkage segment.
The data include off-balance sheet items. The data presented below are computed
net of the liabilities in respect of our preference shares which are classified
for accounting purposes as a liability, since our policy for managing assets and
liabilities is based on the excess of assets over liabilities that are not
related to our equity. The data below are stated in NIS millions:

                                                                     FOREIGN
                                                                     CURRENCY
                             UNLINKED            CPI-LINKED         DENOMINATED/     NON-MONETARY
                          SHEKEL SEGMENT         SEGMENT (*)          LINKED            ITEMS              TOTAL
                          --------------         -----------          ------            -----              -----

December 31, 2006             (456.0)               888.9              26.8              50.9              510.6
December 31, 2005             (505.1)               956.4              13.6              62.5              527.4

     *    Including a perpetual deposit with the Treasury (on December 31, 2006
          - NIS 825.8 million; on December 31, 2005 - NIS 828.2 million).

     The data presented above indicate that the exposure in each linkage segment
is within the boundaries established by our Board of Directors.

     An examination conducted regarding the effect of an increase of 1% in the
CPI indicated that the addition to capital amounts to NIS 9.0 million. A
decrease in the CPI at the same rate will result in a decrease in capital in the
same amount.

     The following table is a sensitivity analysis on the impact of changes in
the exchange rate of the dollar (in NIS millions) on the results our operations:

     Percentage change in the exchange rate of the dollar           (5)%     (10)%      5%     10%
     Impact on results of operations of the Bank                  (1.9)     (3.7)     1.9     3.7

     Our exposure to other currencies is small, therefore the impact thereof on
the results of our operations is marginal.

     The data above are net of the liability in respect of our preference
shares. The data above are calculated without the effect of such changes on
other variables (such as interest rates).

     INTEREST EXPOSURE - The interest risk derives from the effect of future
changes in interest rates on the present value of our assets and liabilities.
Such changes may lead to erosion of our income and capital.

                                      111
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```

     In order to reduce the exposure deriving from possible interest rate
fluctuations, it is our practice, to coordinate, to the extent possible, the
dates of interest rate changes on assets with the interest rate changes on
liabilities.

     Our exposure to interest rate risks is measured by the difference in the
average period to maturity (average duration) in each linkage segment. As noted
above, our Board of Directors sets maximum allowable differences in average
duration for each linkage segment.

     Presented below are the maximum allowed differences in average duration:

     UNLINKED SEGMENT - 4 months.

     CPI-LINKED SEGMENT - 8 months.

     FOREIGN CURRENCY DENOMINATED/LINKED - 2 months.

     Until 2004 the frequency of reporting on the compliance with such
limitations was quarterly. Following the decline in our volume of activity, the
frequency of the aforementioned report was changed to twice a year (semi-annual
report).

                                      112
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```

     Following are the main details as to the average duration in the various
linkage segments (in years):

                                                                                   FOREIGN CURRENCY
                                                                                 DENOMINATED/LINKED
                        UNLINKED SHEKEL SEGMENT       CPI-LINKED SEGMENT               SEGMENT
                           ------------------          -----------------           ----------------
                                                         DECEMBER 31
                           ------------------------------------------------------------------------
                           2006          2005          2006         2005           2006        2005
                           ----          ----          ----         ----           ----        ----

Total assets               0.20          0.11          3.73         3.45           6.52        6.75
Total liabilities          0.09          0.08          3.20         3.29           6.64        6.92
Difference in years        0.11          0.03          0.53         0.16          (0.12)      (0.17)

     The interest risk exists mainly in the CPI-linked segment, since most of
the assets and liabilities in this segment are long-term and at a fixed interest
rate. As at December 31, 2006, the average duration of assets in this segment is
3.73 years while the average duration of liabilities is 3.20 years, so that the
difference is about half a year. A higher average duration of assets creates
exposure to increases in interest rates in this segment. The said exposure to
interest risk is within the limits determined by the our Board of Directors.

     In the non-linked shekel segment, the average duration difference is small
and results from a short average duration of both assets and liabilities, due to
the fact that most of the assets and liabilities are at a variable rate of
interest.

     In the foreign currency segment the average duration is affected by a
considerable amount of credit that has low risk characteristics, and which
carries a fixed rate of interest. The average duration of liabilities in this
segment is higher by 0.12 years than the average duration of assets.

     The following table is an analysis of our exposure to fluctuations in
interest rates as of December 31, 2006. The table includes the fair value of our
assets and liabilities, calculated as explained below:

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ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES AS AT DECEMBER 31, 2006
Reported amounts

                                                                                                     DECEMBER 31, 2006
                                  ------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                    ON          FROM         FROM         FROM        FROM          FROM           FROM                WITHOUT
                                  DEMAND       ONE TO      THREE TO      ONE TO      THREE TO      FIVE TO        TEN TO      OVER      FIXED                                    INTERNAL
                                 AND UP TO     THREE        TWELVE       THREE        FIVE           TEN          TWENTY     TWENTY    MATURITY                     FAIR         RATE OF     AVERAGE
                                 ONE MONTH     MONTHS       MONTHS        YEARS       YEARS         YEARS          YEARS      YEARS     DATE *       TOTAL         VALUE          RETURN     DURATION
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------        -------        -------    -------
                                                                                                        NIS MILLIONS                                                                 %        YEARS
                                  ----------------------------------------------------------------------------------------------------------------------------------------        -------    -------

ISRAELI CURRENCY - UNLINKED
Total assets                        235.4          0.6         14.8          2.6          1.7          2.4              -          -         -        257.5          258.0           6.72       0.20
Total liabilities                   790.6          0.5         18.5            -            -            -              -          -       0.1        809.7          809.7           4.50       0.09
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------        -------        -------    -------
Difference                         (555.2)         0.1         (3.7)         2.6          1.7          2.4              -          -      (0.1)      (552.2)        (551.7)          2.22       0.11
Effect of futures
transactions                         52.2         19.9         24.1            -            -            -              -          -         -         96.2
Exposure to interest rate
fluctuations                       (503.0)        20.0         20.4          2.6          1.7          2.4              -          -      (0.1)      (456.0)
Cumulative segment exposure        (503.0)      (483.0)      (462.6)      (460.0)      (458.3)      (455.9)        (455.9)    (455.9)   (456.0)      (456.0)
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------
ISRAELI CURRENCY -
 LINKED TO THE CPI
Total assets                         15.8         46.9         82.2        122.7         81.7         93.1           41.1          -     825.8      1,309.3        1,311.0           5.00       3.73
Total liabilities                    21.0         11.9         52.2        127.2         85.6         76.7            1.8          -         -        376.4          366.4           2.66       3.20
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------        -------        -------    -------
Difference                           (5.2)        35.0         30.0         (4.5)        (3.9)        16.4           39.3          -     825.8        932.9          944.6           2.34       0.53
Effect of futures
transactions                            -        (19.9)       (24.1)           -            -            -              -          -         -        (44.0)
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------
Exposure to interest rate
fluctuations                         (5.2)        15.1          5.9         (4.5)        (3.9)        16.4           39.3          -     825.8        825.8
Cumulative segment exposure          (5.2)         9.9         15.8         11.3          7.4         23.8           63.1       63.1         -        825.8
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------
FOREIGN CURRENCY AND
 LINKED THERETO
Total assets                         85.0        172.8        466.5      1,051.6        903.4      1,750.3        1,467.6          -         -      5,897.2        5,890.5           6.90       6.52
Total liabilities                     4.4        155.8        466.0      1,053.1        905.1      1,757.6        1,476.2          -     490.6      6,308.8        6,320.7           6.88       6.64
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------        -------        -------    -------
Difference                           80.6         17.0          0.5         (1.5)        (1.7)        (7.3)          (8.6)         -    (490.6)      (411.6)        (430.2)          0.02      (0.12)
Effect of futures
transactions                        (52.2)           -            -            -            -            -              -          -         -        (52.2)
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------
Exposure to interest rate
fluctuations                         28.4         17.0          0.5         (1.5)        (1.7)        (7.3)          (8.6)         -         -            -
Cumulative segment exposure          28.4         45.4         45.9         44.4         42.7         35.4           26.8          -    (490.6)      (463.8)
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------
OVERALL EXPOSURE TO
 FLUCTUATIONS
 IN INTEREST RATES
Total assets**                      336.2        220.3        563.5      1,176.9        986.8      1,845.8        1,508.7          -     825.8      7,464.0        7,459.5           6.76       6.08
Total liabilities                   816.0        168.2        536.7      1,180.3        990.7      1,834.3        1,478.0          -     490.7      7,494.9        7,506.8           6.40       5.72
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------        -------        -------    -------
Difference                         (479.8)        52.1         26.8         (3.4)        (3.9)        11.5           30.7          -     335.1        (30.9)         (37.3)          0.36       0.36
Exposure to interest rate
fluctuations                       (479.8)        52.1         26.8         (3.4)        (3.9)        11.5           30.7          -     335.1        (30.9)
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------
Cumulative exposure                (479.8)      (427.7)      (400.9)      (404.3)      (408.2)      (396.7)        (366.0)         -     (30.9)       (30.9)
                                  -------      -------      -------      -------      -------      -------        -------    -------   -------      -------
General notes -

1.   The data classified according to maturity date, presented above, represent
     the present value of future flows, discounted at the internal rate of
     return, for each balance sheet item. Such discounted future flows include
     interest, which will accrue until the earlier of the maturity date or the
     date of change in the interest rate.

2.   The effect of hedging transactions is included in the total of assets or
     liabilities, as the case may be.

3.   The table does not include the effect of early repayments.

*    The amounts stated in the "without fixed maturity date" column are the
     amounts as stated in the balance sheet.

**   Including shares, which are stated in the "without fixed maturity date"
     column.

                                      114
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```

     The fair value of our assets and liabilities as presented in the table
above was calculated in accordance with the following principles, assumptions
and methods:

     o Since most of our assets and liabilities are not traded on active
markets, and thus market quotations are not available, the fair value is arrived
at by using accepted pricing models, such as the present value of future cash
flows discounted at interest rates, which reflect the level of risk inherent in
the assets and liabilities. Estimating the fair value by way of determining the
future cash flows and setting the discount interest rate is subjective.
Therefore, regarding most of the assets and liabilities, the fair value estimate
is not necessarily an indication of their realizable value on balance sheet
date. The estimate of the fair value was made at interest rates prevailing at
balance sheet date and did not take interest rate fluctuations into
consideration. The use of other interest rates would result in significantly
different fair values. This is especially true in regard to non-interest bearing
assets and liabilities or those bearing fixed interest rates. Furthermore,
commissions receivable or payable resulting from the business activity, were not
taken into account, neither was the tax effect considered. Moreover, the
difference between the book value and the fair value of the assets and
liabilities may not be realized, because in most cases, we are likely to hold
the assets and liabilities until redemption. In view of the above, it should be
emphasized, that the data contained in the above table should not be considered
as an indication of our value as a going concern. Furthermore, considering the
wide range of valuation and estimation techniques, which may be applied in
arriving at fair values, caution should be used in comparing the fair values
arrived at by different banks.

     o As mentioned in Item 4, the Bank of Israel has granted us a special line
of credit, bearing interest equal to the Bank of Israel rate of interest. The
discount rate of the cash flows of our deposits is set by us, for purposes of
the fair value of the liabilities, on the basis of the said interest rate.

     o The fair value of deposits with banks and credit to the Government is
arrived at by use of the method of discounting future cash flows at interest
rates used by us in similar transactions proximate to balance sheet date.

     o Marketable securities are valued at market value. Shares for which no
market value is readily available are stated at cost.

     o The fair value of the balance of credit to the public was arrived at by
using the method of the present value of future cash flows discounted at an
appropriate interest rate. The balance of such credit was segmented into several
categories. The future aggregate cash flows of each category (principal and
interest) were calculated. Such cash inflows were discounted at an interest
rate, which reflects the level of risk inherent in the credit. Generally, this
interest rate is set on the basis of the rate at which similar transactions were
effected by us as at balance sheet date. For short-term balances of credit (for
an initial period of up to three months), or balances at variable market
interest rates (prime, Libor, etc.), which change at intervals of up to three
months, their stated value is considered to be their fair value.

                                      115
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```

     o The fair value of problematic debts was calculated by using discount
rates reflecting their inherent high credit risk. In any event, such discount
rates were not less than the highest interest rate used by us in our operations
proximate to balance sheet date. The future cash flows of problematic debts were
calculated net of the specific allowances for doubtful debts. The general and
supplementary allowances for doubtful debts in an aggregate amount of NIS 51.7
million (as of December 31, 2006), were not deducted from the balance of credit
to the public for cash flows purposes in assessing the fair value.

     o Regarding perpetual deposits with the Israeli Treasury, the accepted
pricing models cannot be applied to such deposits. Therefore, their book value
is considered to be their fair value. See "Item 3. Key Information-Risk Factors"
above for details of the terms of these deposits.

     o The fair value of deposits, debentures and capital notes was arrived at
by the method of discounting the future cash flows at the interest rate paid by
us in obtaining similar deposits, or the interest rate of similar debentures and
capital notes if they were issued by us, prevailing as at of balance sheet date.

     o Regarding deposits from the Bank of Israel, the balance in the balance
sheet is a close approximation of the fair value since the deposits are at
variable rates of interest.

     o Regarding financial instruments (other than derivative marketable
financial instruments) for an initial period not exceeding three months and
bearing variable market interest rates, the amount stated in the balance sheet
represents an approximation of the fair value subject to changes in credit risks
and our interest margins in transactions at variable interest rates.

     As part of the limitations on the rate of exposure to changes in interest
rates, limitations were also set with respect to the change in the calculated
value of our assets and liabilities in the event of a 1% change in interest in
comparison with the accepted interest rates as at the date of the report.

     Presented below are the limitations that were set by our Board of Directors
with respect to the maximum allowed amount of a net decline in value:

     UNLINKED SEGMENT - a maximum decline in value of NIS 4 million.

     CPI-LINKED SEGMENT - a maximum decline in value of NIS 14 million.

     FOREIGN CURRENCY DENOMINATED/LINKED - a maximum decline in value of NIS 3
million.

                                      116
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```

     Presented below is the effect of the aforementioned changes on the
calculated value of the assets and liabilities as at December 31, 2006 (in NIS
millions):

LINKAGE SEGMENT                        INCREASE OF 1% IN INTEREST RATE              DECREASE OF 1% IN INTEREST RATE
                                   ---------------------------------------       --------------------------------------
                                DECREASE IN    DECREASE IN                     INCREASE IN    INCREASE IN
                                  VALUE OF       VALUE OF       NET DECREASE     VALUE OF       VALUE OF     NET INCREASE
                                   ASSETS       LIABILITIES       IN VALUE       ASSETS        LIABILITIES     IN VALUE
                                   ------       -----------       --------       ------        -----------     --------

CPI-linked                           (19.1)         (10.2)          (8.9)           20.7           10.7          10.0
Foreign currency
denominated or linked               (378.7)        (379.7)          (1.0)          418.5          419.5           1.0

     In the unlinked segment the effect of a change of 1% in interest is
insignificant and was therefore not included in the table.

     The aforementioned calculation is based on the accepted calculations for
measuring the average duration of assets, meaning the discounting of future cash
flows, including interest that will accrue until maturity, or until the date the
interest rate changes, whichever is earlier. The aforementioned calculation of
the change in the value of assets and liabilities is only in respect of a given
change in interest rates, without effects of the aforementioned change in
interest rates on other factors (such as the forecasted rate of inflation,
etc.).

     It should be noted that the aforementioned calculation measures only the
effect of the change in interest and does not relate to credit risks. The change
in the calculated value of assets and liabilities in foreign currency as a
result of a given change of 1% is high, as it is affected mainly by long-term
credit in foreign currency from the deposit of the State and guaranteed by the
State. The change affects both the assets and the liabilities and as shown the
net differences are small.

     The rate of the net changes in all the linkage segments is low in
comparison with the volume of assets of the segment.

     DERIVATIVE FINANCIAL INSTRUMENTS - As part of its policy for asset and
liability management, the Bank conducts transactions in financial derivatives.

     As a result of the events in the second half of 2002, our activities in
derivative financial instruments were reduced to a minimum and at present they
are mainly limited to forward transactions, SWAP transactions and the purchasing
of foreign currency options for purposes of closing our position exposure.

     The risk to which we are exposed due to the derivative financial
instruments is not material to our financial position.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

                                      117
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                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

CESSATION OF DIVIDEND DISTRIBUTION

     Our issued and outstanding share capital includes, among others, our C
Shares, CC Shares and CC1 Shares and our D Shares and DD shares. The C Shares,
CC Shares and CC1 Shares entitle the holders thereof to a cumulative preferred
dividend of 6% per annum plus a participating dividend. The D and DD shares
entitle the holders thereof to a cumulative preferred dividend of 7.5% per
annum.

     According to Article 6 of our Articles of Association, the C Shares, CC
Shares, CC1Shares, D Shares and DD Shares rank first (pari passu with each
other) and prior to all of our other classes of shares, in any distribution of
dividends, provided, however, that if there are arrears of any fixed cumulative
preferential dividends, then according to Article 130 of our Articles of
Association, our Board of Directors is bound to recommend to the general meeting
of shareholders the payment of arrears prior to any other distribution. The
payment of cumulative preferential dividends to the holders of our Ordinary
Preferred Shares, totaling approximately $20 per annum, is prior to the dividend
on our Ordinary A Shares and Ordinary B Shares.

     According to Article 7 of our Articles of Association, upon liquidation of
the Bank, the assets available for distribution to the shareholders will be
first distributed to pay cumulative preferred dividends in arrears to all
classes of Preferred shares, I.E. the C Shares, CC Shares, CC1 Shares, D and DD
shares.

     According to the Companies Law , a company may distribute dividends only
from its profits. Under certain circumstances, however, a company may seek court
approval to pay dividends in the absence of profits. Under the Directives of
Proper Banking Procedures, the Supervisor of Banks has prohibited banking
corporations from distributing dividends, without his prior approval, if, among
other things, such banking corporations have losses in one or more of the last
three calendar years or if the aggregate results of three quarters ending in the
interim period for which the last interim financial statements were issued
reflect a loss.

     We ended the year 2004 with a modest profit and the years 2005 and 2006
with losses. Since the first quarter of 2002, we have not had profits from which
we could distribute dividends. The last quarterly dividend that we paid in
respect of our C Shares, our CC Shares, our CC1 Shares, our D Shares and our DD
Shares was the dividend for the second quarter of 2002, which payment of
dividends was made with court approval and approval of the Supervisor of Banks.

                                      118
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     The proceeds of the issuance of our C Shares, our CC Shares, our CC1
Shares, our D Shares and our DD Shares, were deposited by us with the Ministry
of Finance of the State of Israel pursuant to deposit agreements. In our
financial statements, we refer to our deposits with the Ministry of Finance as
the perpetual deposit. According to the deposit agreements, our perpetual
deposit with the Ministry of Finance earns interest at a rate of 7.5% per annum
(plus differentials of linkage to the U.S. dollar), which interest must be paid
by the Ministry of Finance to us on the payment dates for the dividends to be
paid by us on our Preferred Shares.

     When we ceased making dividend payments on our Preferred Shares, the
Ministry of Finance also ceased paying us the interest payments on the perpetual
deposits. The deposit agreements do not expressly stipulate how the interest on
our perpetual deposits with the Ministry of Finance should be handled during
periods in which we are prevented from distributing dividends on our Preferred
Shares, and whether the interest will accrue and be paid if we ultimately pay
accrued dividends on such Preferred Shares in arrears, or upon liquidation.

     Immediately prior to the publication of our financial statements for the
third quarter of 2002, our Board of Directors, assisted by legal advice, decided
not to distribute, for the time being, a dividend for the third quarter of 2002.
The decision was reached after considering, among other things, the following
issues:

     o our results of operations of the third quarter of 2002 and the liquidity
crisis which affected us during the third quarter of 2002;

     o our lack of distributable profits (as required by the Companies Law);

     o the prohibition on the distribution of dividends according to our
Articles of Association when there are no profits, not even nominal profits;

     o the prohibition on distribution of dividends according to the Directives
of Proper Banking Procedures, as long as the Supervisor of Banks did not permit
the distribution; and

     o the possibility that the interest on our perpetual deposits with the
Ministry of Finance would continue to accrue even if not actually paid, if no
dividend is distributed.

     We submitted a request to the Supervisor of Banks for guidance relating to
the distribution of dividends for the third quarter of 2002. On December 1,
2002, the Supervisor of Banks, in response to our request for guidance,
indicated, among other things, that under the circumstances, it would be
inappropriate for us to distribute a dividend for the third quarter of 2002.
Nevertheless, the Supervisor of Banks noted that it was still not entirely clear
as to (a) the legal aspects of various questions connected with the distribution
of the dividends and (b) the accrual of interest on the perpetual deposits, and
the position of the State of Israel on this issue. The Supervisor of Banks, in
the interest of resolving the open issues, sent a copy of our request for
guidance to the Government Companies Authority and the Accountant General in the
Treasury and sought their input.

                                      119
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```

     Because it was unclear whether or not interest is accruing on the perpetual
deposits during the period in which we are prevented from distributing dividends
and in consideration of the possible ramifications of the interest accrual on
the distribution of dividends in respect of the Preferred Shares, the Board of
Directors consulted legal counsel and concluded that the interest not paid on
the perpetual deposits , as a result of our failure to distribute dividends,
should accrue to us and, accordingly, in the event of our liquidation, the
interest should be paid into the liquidation fund. In a letter dated January 22,
2003, we requested from the Ministry of Finance and the Government Companies
Authority that they promptly issue their respective positions in this matter.

     In its reply dated March 13, 2003, the Ministry of Finance stated, among
other things, that the monies paid on the perpetual deposits for purposes of
distributing the dividend will be transferred to us solely for purposes of
redeeming the D Shares and DD Shares, or upon liquidation. In order to clarify
matters and to avoid doubt, we once again petitioned the Ministry of Finance to
confirm that it accepts the position of our Board of Directors as described in
the preceding paragraph. Despite requests that were sent by the Bank to the
Ministry of Finance regarding this issue, the requested clarification still was
not obtained. The Board of Directors has deliberated the matter of the dividend
on the said preferred shares several times, and after taking into account all of
the considerations and circumstances described above, has decided to abide by
its previous decision and to refrain from distributing any further dividend for
the time being.

     As stated above, from the date the Bank stopped paying the dividend on the
aforementioned preferred shares, the State has ceased paying to the Bank the
interest on its perpetual deposits.

     The accrued amount of the dividend, at the annual rate of 7.5%, in respect
of the aforementioned preferred shares (including a 1.5% participating dividend
for C Shares, CC Shares and CC1 Shares) that has not been paid since the Bank
ceased paying the dividend, amounts to NIS 167.0 million as at December 31,
2006. This amount was not recorded in the financial statements and it is equal
to the amount of the accrued interest on the perpetual deposits of the Bank with
the Israeli Treasury, which was also not recorded in the financial statements.

     The accrued amount of NIS 167.0 million is comprised as follows: NIS 102.3
million is in respect of non-participating shares (D Shares and DD Shares) and
NIS 64.7 million is in respect of participating shares (C Shares, CC Shares and
CC1 Shares). Of this amount, an amount of NIS 36.8 million is in respect of 2006
and is comprised as follows: NIS 22.7 million is in respect of D Shares and DD
Shares and NIS 14.1 million is in respect of C Shares, CC Shares and CC1 Shares.
See "Item 3. Key Information-Risk Factors" above for a discussion.

                                      120
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```

     On September 28, 2004 various financial entities that hold our class C,
class CC and/or class CC1 Shares filed with the Tel Aviv District Court an
originating motion in which the Court is requested to instruct us to pay to our
shareholders back dividends at the same rate and relevant quarterly dates as was
paid until the second quarter of 2002. As of March 31, 2006, this would amount
to approximately NIS 105.1 million. The petitioners contend, among other things,
that, according to our Articles of Association, we are required to pay to the
holders of our Preferred Shares an annual dividend at the rate of 7.5%, and that
this annual dividend is not actually a dividend but rather a payment made in
full by the State of Israel in respect of the perpetual deposits we maintain
with the State. The petitioners contend that the annual dividend is not subject
to the distribution conditions provided by law, since the dividend is not paid
from our profits but rather by a third party (the State of Israel) and therefore
its payment does not lessen our assets. Moreover, they contend that even if the
distribution conditions should be applied to the annual dividend, we should
still be ordered to distribute the annual dividends, because we have met the
repayment ability test because the annual dividend is being fully financed by
the State of Israel and not being deducted from our capital.

     Whereas management believes the matter relating to dividends distribution
is connected to the question of whether under the circumstances of a
non-distribution of dividends, the interest on our perpetual deposits with the
Israeli Treasury is accrued in our favor, and whereas the answers received from
the Ministry of Finance in this matter have been unclear and insufficient, we
have requested from the Tel Aviv District Court a declaratory judgment against
the State, by which the interest on the perpetual deposits is indeed accrued in
our favor, as is the position of our Board of Directors on this matter.
Following the requests of our bank and the aforementioned financial entities,
the Court ordered that the hearing on the two originating motions be
consolidated. In the reply of the Minister of Finance to the originating motions
prior to a preliminary hearing that was held on January 12, 2006, the Minister
of Finance announced that his position is that the interest on the perpetual
deposits does not accrue in our favor when we do not distribute a dividend, and
that in any event, in light of our circumstances, there is no justification for
our distributing a dividend. On March 23, 2006, the court ruled that it will
first hear arguments and give its decision regarding the issue of the accrual of
the interest on our deposits with the Treasury, since such a decision will
advance the hearing and the decisions regarding the other relevant issues. The
filing of the parties' arguments was completed in January 2007, however the
court has yet to issue its ruling. The fundamental position of our Board of
Directors is that if the interest does not accrue on the perpetual deposits, the
Board of Directors will reconsider its position regarding renewal of the
dividend distribution, subject to the legal and regulatory restrictions
applicable to the Bank in this respect, including the need to receive approvals
and to amend the our articles.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS

     None.

                                      121
```

```

ITEM 15. CONTROLS AND PROCEDURES

     We have evaluated, with the participation of our General Manager and
Comptroller, the effectiveness of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as
of the end of the period covered by this Annual Report on Form 20-F. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon our evaluation, our General
Manager and Comptroller concluded that our disclosure controls and procedures,
as of December 31, 2006, were effective to provide reasonable assurance that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the applicable rules and forms, and that it is
accumulated and communicated to our management, including our General Manager
and Comptroller, as appropriate to allow timely decisions regarding required
disclosure.

     There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15 or 15d-15 under the Exchange Act) that occurred during
the period covered by this annual report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

     It should be noted that our management has identified certain issues
relating to the processing and reporting of information as required by the rules
and regulations of the Securities and Exchange Commission (the "SEC"). In
particular, our system of financial reporting was not designed to reconcile our
financial statements (which are prepared in accordance with Israeli GAAP) with
U.S. GAAP in accordance with the requirements of Form 20-F. This issue primarily
resulted from our lack of qualified financial and accounting personnel with
knowledge and expertise in U.S. GAAP and the requirements of the SEC and the
Public Company Accounting Oversight Board (the "PCAOB"). In addition, the severe
liquidity crisis that we faced in 2002 and the subsequent implementation of the
run-off plan negatively affected our ability to address and correct this issue.

     Our accounting personnel have outlined the issues relevant to the
reconciliation of our financial statements to U.S. GAAP and the methods of
preparing such a reconciliation. In addition, we have retained U.S. counsel to
advise as to the requirements of Form 20-F and related SEC rules and
regulations. In preparing the U.S. GAAP reconciliation of our financial
statements, our accounting personnel were guided by the experience they acquired
in the previous annual reports. Our accounting personnel regularly consult with,
and seek the assistance of, outside accounting advisors in connection with the
required reconciliation of our financial statements to U.S. GAAP. Moreover, they
periodically seek from such outside accounting advisors relevant updates
regarding SEC and PCAOB rules and regulations relating to reconciliation to U.S.
GAAP.

                                      122
```

```

     In connection with authorizations into our computer system, it was found
that our programmers have authorization capabilities within the production
environment. This could allow a programmer to make unauthorized changes in
programs or data in the production environment. It should be noted that the
number of new programs prepared for installation in our computer is extremely
limited; nonetheless we have controls in place to minimize the possibility of
changes being made in the data. Furthermore, we intend to install further
systems in order to create and/or improve the separation of functions in a
substantial portion of the computer systems.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     Our Board of Directors has determined that we have two Audit Committee
financial experts (as defined in the instructions to Item 16A of Form 20-F)
serving on the Audit Committee, Mr. Yacob Aizner and Ms. Shulamit Eshbol. Mr.
Aizner is an appointee of Bank Leumi le-Israel B.M and Ms. Eshbol is an
appointee of the State of Israel. Both Mr. Aizner and Ms. Eshbol are
"independent" (as defined by NASDAQ Rules 4200(a)(15) and 4350(c) and (d)).

ITEM 16B. CODE OF ETHICS

     We have adopted a code of ethics (as defined in Item 16B of Form 20-F) that
applies to all our directors, officers and employees (the "Code of Ethics"). We
have filed a copy of this code of ethics as Exhibit 11.1 to our annual report on
Form 20-F for the fiscal year ended December 31, 2003. No amendments have been
made to the Code of Ethics in the most recent fiscal year.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     According to the Companies Law, the remuneration of the independent auditor
for auditing work shall be established by the shareholders at the general
meeting, by the board of directors if the shareholders so authorize, or, if the
matter is prescribed in the articles of association, as prescribed therein. Our
shareholders authorized our Board of Directors to establish the remuneration of
the independent auditors for auditing work done in 2006, subject to the fee
schedule of the Government Companies Authority.

     Furthermore, the Companies Law stipulates that the remuneration of the
independent auditors for services other than auditing work shall be established
by the board of directors unless the articles of association state that
remuneration for such services shall be established by the shareholders at the
general meeting.

     Pursuant to the above, the remuneration of our independent auditors for
audit work and other services in 2005 and 2006 was established by our Board of
Directors.

                                      123
```

```

     KPMG - Somekh Chaikin, Certified Public Accountants (Isr.), has served as
our independent public accountant for each of the fiscal years in the three-year
period ended December 31, 2006, for which audited financial statements appear in
this annual report on Form 20-F. For the year ending December 31, 2006, PWC -
Kesselman & Kesselman, Certified Public Accountants (Isr.) served together with
KPMG as joint auditors, for the auditing of our Israeli financial statements
only. For the years ended December 31, 2006 and 2005, the aggregate fees billed
and/or agreed to by KPMG and its affiliates and to PWC are as follows:

                            2006         2005
                            -----       -----
                          (IN THOUSANDS OF NIS)
                            -----------------

Audit Fees(1)               1,145         979
Audit-related Fees(2)          35          70
Tax Fees(3)                    30          29
                            -----       -----

TOTAL                       1,210       1,078
                            =====       =====

(1)  Audit Fees consist of fees billed for the annual audit of the company's
     consolidated financial statements or services that are normally provided by
     the accountant in connection with statutory and regulatory filings or
     engagements. They also include fees billed for services that only the
     external auditor reasonably can provide, and include the provision of
     comfort letters and consents and the review of documents filed with the
     SEC.

(2)  Audit-related Fees consist of fees billed for assurance and related
     services that are reasonably related to the performance of the audit or
     review of the company's financial statements or that are traditionally
     performed by the external auditor, and include consultations concerning
     financial accounting and reporting standards.

(3)  Tax Fees include fees billed for tax compliance services, including the
     preparation of original and amended tax returns and claims for refund; tax
     consultations, such as assistance and representation in connection with tax
     audits and appeals, and requests for rulings or technical advice from
     taxing authorities; tax planning services; consultation and planning
     services

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     Not applicable.

                                      124
```

```

                                                 PART III

ITEM 17. FINANCIAL STATEMENTS

     The following financial statements are filed as part of this annual report:

     Our audited balance sheets as of December 31, 2006 and December 31, 2005
and the statements of income (loss), shareholders' equity and cash flows for the
years ended December 31, 2006, 2005 and 2004, including the notes thereto and
together with the Report of Independent Registered Public Accounting Firm
thereon, are included at pages F-1 to F- 86 to this annual report.

     OUR FINANCIAL STATEMENTS CONFORM WITH ISRAELI GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND THE INSTRUCTIONS OF THE SUPERVISOR OF BANKS (ISRAEL) ("ISRAELI
GAAP"), WHICH DIFFER IN CERTAIN RESPECTS FROM THOSE GENERALLY ACCEPTED IN THE
UNITED STATES ("U.S. GAAP") AS DESCRIBED BELOW IN NOTE 32 TO THE FINANCIAL
STATEMENTS.

ITEM 18. FINANCIAL STATEMENTS

     See Item 17 above.

ITEM 19. EXHIBITS

   EXHIBIT
   NUMBER                                  DESCRIPTION
   ------                                  -----------

     1.1       Memorandum and Articles of Association of Israel Development Bank
               of Israel Ltd. (translation) (incorporated by reference to
               Exhibit 1.1 to the Annual Report on Form 20-F of Industrial
               Development Bank of Israel Limited for fiscal year ended December
               31, 2003).

     4.1       Summary of run-off plan (incorporated by reference to Exhibit 4.1
               to the Annual Report on Form 20-F of Industrial Development Bank
               of Israel Limited for fiscal year ended December 31, 2005).

     4.2       Summary of Lease Agreement (incorporated by reference to Exhibit
               4.2 to the Annual Report on Form 20-F of Industrial Development
               Bank of Israel Limited for fiscal year ended December 31, 2005).

     4.3       Summary of the Special Line of Credit from the Bank of Israel
               (incorporated by referereference to Exhibit 4.3 to the Annual
               Report on Form 20-F of Industrial DevelDevelopment Bank of Israel
               Limited for fiscal year ended December 31, 2005).

     4.4       Summary of Perpetual Deposit Agreement (incorporated by reference
               to Exhibit 4.4 to the Annual Report on Form 20-F of Industrial
               Development Bank of Israel Limited for fiscal year ended December
               31, 2005).

     4.5       Summary of Computer Services Outsourcing Agreement (incorporated
               by reference to Exhibit 4.5 to the Annual Report on Form 20-F of
               Industrial Development Bank of Israel Limited for fiscal year
               ended December 31, 2005).

                                      125
```

```

     4.6       Summary of Special Collective Agreement with Employees
               (incorporated by reference to Exhibit 4.6 to the Annual Report on
               Form 20-F of Industrial Development Bank of Israel Limited for
               fiscal year ended December 31, 2005).

     4.7       Summary of Indemnification Agreement for Directors and Senior
               Officers (incorporated by reference to Exhibit 4.7 to the Annual
               Report on Form 20-F of Industrial Development Bank of Israel
               Limited for fiscal year ended December 31, 2005).

     4.8       Summary of the Kibbutzim Debt Agreement (incorporated by
               reference to Exhibit 4.8 to the Annual Report on Form 20-F of
               Industrial Development Bank of Israel Limited for fiscal year
               ended December 31, 2005).

     4.9       Summary of Credit to the Israel Electric Corporation Ltd.
               (incorporated by reference to Exhibit 4.9 to the Annual Report on
               Form 20-F of Industrial Development Bank of Israel Limited for
               fiscal year ended December 31, 2005)

     11.1      Code of Ethics (incorporated by reference to Exhibit 11.1 to the
               Annual Report on Form 20-F of Industrial Development Bank of
               Israel Limited for fiscal year ended December 31, 2003).

     12.1      Certification of Uri Galili, General Manager of Industrial
               Development Bank of Israel Ltd., pursuant to 15 U.S.C.
               Section 78(m)(a), as adopted pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002.

     12.2      Certification of Rimon Shmaya, Comptroller of Industrial
               Development Bank of Israel Ltd., pursuant to 15 U.S.C.
               Section 78(m)(a), as adopted pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002.

     13.1      Certification of Uri Galili, General Manager of Industrial
               Development Bank of Israel Ltd., pursuant to 18 U.S.C.
               Section 1350 as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002.

     13.2      Certification of Rimon Shmaya, Comptroller of Industrial
               Development Bank of Israel Ltd., pursuant to 18 U.S.C.
               Section 1350 as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002.

     99.1      Proposed Plan for the Possible Sale and/or Transfer of all of the
               Bank's Issued and Paid Share Capital (incorporated by reference
               Exhibit 99.1 to the Report on Form 6-K of Industrial Development
               Bank of Israel Limited filed on June 19, 2007).

                                      126
```

```

                                   SIGNATURES

     The Registrant hereby certifies that it meets all the requirements for
filing on Form 20-F and has duly caused and authorized this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.

INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED

By: /s/ Uri Galili                         By: /s/ Natan Atlas
------------------                         -------------------
Uri Galili, General Manager                Natan Atlas, General Secretary

Dated: July 31, 2007.

                                      127
```

```

                         THE INDUSTRIAL DEVELOPMENT BANK
                               OF ISRAEL LIMITED

                              FINANCIAL STATEMENTS
                               FOR THE YEAR ENDED
                                DECEMBER 31, 2006
```

```

                                   Industrial Development Bank of Israel Limited

FINANCIAL STATEMENTS AS AT DECEMBER 31, 2006
--------------------------------------------------------------------------------

CONTENTS

                                                                           PAGE

Report of Independent Registered Public Accounting Firm                    F-1

Balance Sheets                                                             F-3

Statements of Income (Loss)                                                F-4

Statements of Shareholders' Equity                                         F-5

Statements of Cash Flows                                                   F-6

Notes to the Financial Statements                                          F-7
```

```

      Somekh Chaikin

      Mail address         Office address              Telephone  972 3 684 8000
      PO Box 609           KPMG Millennium Tower       Fax  972 3 684 8444
      Tel-Aviv 61006       17 Ha'arba'a Street
      Israel               Tel Aviv 61070
                           Israel

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS OF
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED

We have audited the accompanying financial statements of Industrial Development
Bank of Israel Limited (the Bank), detailed hereunder:

a.   Balance sheets as at December 31, 2006 and 2005

b.   Statements of income (loss) , shareholders' equity, and cash flows, for
     each of the three years, the last of which ended December 31, 2006

These financial statements are the responsibility of the Bank's Board of
Directors and of its Management. Our responsibility is to express an opinion on
these financial statements, based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Such standards require that we plan
and perform the audits to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and by Management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Bank as at December 31,
2006 and 2005 and the results of its operations, the changes in the
shareholders' equity and its cash flows for each of the three years, the last of
which ended December 31, 2006, in conformity with accounting principles
generally accepted in Israel. Furthermore, in our opinion, these statements have
been prepared in accordance with the directives and guidelines of the Supervisor
of Banks in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States.
Information relating to the nature and effect of such differences is presented
in Note 32 to the financial statements.

As explained in Note 1C, the aforementioned financial statements are presented
in reported amounts in accordance with accounting standards of the Israel
Accounting Standards Board and the directives and guidelines of the Supervisor
of Banks in Israel.

                    Somekh Chaikin, a partnership registered
                    under the Israeli Partnership Ordinance,
                    is the Israeli member firm of KPMG
                    International, a Swiss cooperative.
```

```

The accompanying financial statements have been prepared assuming that the Bank
will continue as a going concern. As discussed in Note 1 and 16A to the
financial statements we draw attention to the following:

A.   The severe liquidity problems the Bank experienced in August 2002, which
     were caused by increased withdrawals of public deposits. Following these
     liquidity problems, on August 22, 2002, the Bank turned to the Governor of
     the Bank of Israel with a request for a special line of credit.

B.   The special line of credit granted to the Bank by the Bank of Israel, as
     discussed in Note 1.

C.   The decision of the Bank's Board of Directors to adopt a "Run-Off" plan for
     the supervised sale of the Bank's credit assets, and to extend the plan
     until July 31, 2008, and the decision of the Ministerial Committee for
     Social and Economic Affairs (The Social Economic Cabinet) to extend the
     "Run Off" plan (hereunder - the Government's decision extending the "Run
     Off" plan), as discussed in Note 1.

D.   The agreement of the Bank's Board of Directors to restrict the license of
     the Bank and to limit its duration until the end of the "Run-Off" plan, and
     the announcement of the Governor of the Bank of Israel regarding the
     restriction of the Bank's license and its being revoked as from August 1,
     2008, as discussed in Note 1.

E.   The minimum capital ratio of the Bank as at December 31, 2006, that has
     fallen below the minimum of 9% set by the Supervisor of Banks in Israel in
     Proper Banking Procedures Regulations.

The foregoing factors listed above raise substantial doubts as to the ability of
the Bank to continue operating as a going concern. The ability of the Bank to
repay its liabilities is contingent upon the continuation of the special line of
credit from the Bank of Israel and the implementation of the "Run-Off" plan, in
addition to the continued forbearance by the Bank of Israel.

The financial statements do not contain any changes in the value and
classification of assets and liabilities that may be needed when the Bank ceases
operating as a banking entity.

As well, we call attention to the following:

A.   Note 21 to the financial statements regarding the litigation pending
     against the Bank and its executive officers, as detailed in the said Note.

B.   Note 1D to the financial statements regarding the initial implementation of
     Standard No. 22, "Financial Instruments: Disclosure and Presentation"
     effective January 1, 2006 which resulted in a reduction in shareholders'
     equity in an amount of NIS 204.1 million, as a result of the classification
     of participating preference shares of Class C, CC, and CC1 which were
     previously classified as shareholders' equity, as liabilities under the
     item of "Participating preference shares".

Somekh Chaikin
Certified Public Accountants (Isr.)

July 31, 2007
```

```

BALANCE SHEETS AS AT DECEMBER 31
--------------------------------------------------------------------------------

Reported amounts

                                                                 2006            2005
                                                                -------         -------
                                                     NOTE     NIS MILLIONS    NIS MILLIONS
                                                    -----       -------         -------

ASSETS

Cash and deposits with banks                          2            66.4            72.9

Securities                                            3            50.4            63.2

Credit to the public                                  4         6,519.1         7,680.7

Credit to governments                                 5            41.5            59.0

Fixed assets                                          6             1.1             1.2

Other assets                                          7            12.1            15.6

Perpetual deposits with the Israeli Treasury          8           825.8           828.2
                                                                -------         -------

Total assets                                                    7,516.4         8,720.8
                                                                =======         =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits of the public                                9            66.9           178.2

Deposits of banks                                    10           768.3         1,048.8

Deposits of the Government                                      6,087.4         6,883.0

Perpetual deposit                                    11             0.1             0.1

Capital notes                                        12            24.9            26.9

Other liabilities                                    13            58.2            56.4

Non-participating shares                             14           303.2           330.3

Participating preference shares                      15           187.4               -
                                                                -------         -------

Total liabilities                                               7,496.4         8,523.7

Shareholders' equity                                 16            20.0           197.1
                                                                -------         -------

Total liabilities and shareholders' equity                      7,516.4         8,720.8
                                                                =======         =======

______________________     _______________________    ______________________
  Dr. Raanan Cohen -            Uri Galili -              Rimon Shmaya -
Chairman of the Board         General Manager              Comptroller

Date of approval of the financial statements: July 31, 2007

The accompanying notes are an integral part of the financial statements.

                                     F - 3
```

```

                               The Industrial Development Bank of Israel Limited

STATEMENTS OF INCOME (LOSS) FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------

Reported amounts

                                                                         2006             2005             2004
                                                                      --------          -------          -------
                                                          NOTE      NIS MILLIONS     NIS MILLIONS     NIS MILLIONS
                                                        -------       --------          -------          -------

Profit from financing operations
 before allowance for doubtful debts                        23            18.2             61.6             66.2
Allowance for doubtful debts                                4C            21.7             44.2             70.2
                                                                      --------          -------          -------
Profit (loss) from financing operations
 after allowance for doubtful debts                                       (3.5)            17.4             (4.0)
                                                                      --------          -------          -------
OPERATING AND OTHER INCOME
Operating commissions                                       24             1.3              2.2              4.1
Gains from investments in shares                            25            16.4             11.3             41.5
Other income                                                26             3.8              4.7              4.6
                                                                      --------          -------          -------
Total operating and other income                                          21.5             18.2             50.2
                                                                      --------          -------          -------

OPERATING AND OTHER EXPENSES
Salaries and related expenses                               27            17.6             18.2             19.7
Expenses (income) in respect of employee
 retirement                                                                0.5              5.5             (0.8)
Maintenance and depreciation of buildings
 and equipment                                                             2.7              3.8              5.7
Other expenses                                              28            14.3             16.5             20.4
                                                                      --------          -------          -------
Total operating and other expenses                                        35.1             44.0             45.0
                                                                      --------          -------          -------
Operating profit (loss) before taxes on income                           (17.1)            (8.4)             1.2
Provision for taxes on operating income                     29               -                -                -
                                                                      --------          -------          -------
Operating profit (loss) after taxes on income                            (17.1)            (8.4)             1.2
                                                                      --------          -------          -------

OTHER ITEMS

Capital gain, net                                                            -                -              0.2
                                                                      --------          -------          -------

NET EARNINGS (LOSS) FOR THE YEAR                                         (17.1)            (8.4)             1.4
                                                                      ========          =======          =======

                                                                             NET EARNINGS (LOSS) PER SHARE
                                                                      ------------------------------------------
                                                                        2006             2005              2004
                                                                      --------          -------          -------
                                                                         NIS              NIS              NIS
                                                                      --------          -------          -------

"A" ordinary shares                                                   (1,132.4)         *(556.3)           *92.7
                                                                      ========          =======          =======

                                                                     WEIGHTED QUANTITY OF SHARES USED IN COMPUTING
                                                                                  EARNINGS PER SHARE
                                                                      ------------------------------------------
                                                                        2006             2005              2004
                                                                      --------          -------          -------

"A" ordinary shares                                                      1,510            1,510            1,510
                                                                      ========          =======          =======

*    Restated. See Note 1Q.

The accompanying notes are an integral part of the financial statements.

                                     F - 4
```

```

                               The Industrial Development Bank of Israel Limited

STATEMENT OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

Reported amounts

                                                                                                ADJUSTMENTS
                                                                 ACCUMULATED     ACCUMULATED       FROM
                                                                DIFFERENCE ON   DIFFERENCE ON   PRESENTATION
                                                                  TRANSLATION    TRANSLATION   OF AVAILABLE-
                                                                      OF              OF         FOR-SALE                        TOTAL
                                       ORDINARY     PREFERENCE   DOLLAR LINKED    CPI LINKED    SECURITIES     ACCUMULATED   SHAREHOLDERS'
                                        SHARES        SHARES        DEPOSIT(*)     DEPOSIT(*)  AT FAIR VALUE       LOSS         EQUITY
                                        -------       -------        -------        -------       -------        -------        -------
                                                                                  NIS MILLIONS
                                        -----------------------------------------------------------------------------------------------

BALANCE AS AT
 JANUARY 1, 2004                          131.4       1,068.0         (697.5)         190.2          10.4         (506.9)         195.6
CHANGES DURING 2004
Net earnings                                  -             -              -              -             -            1.4            1.4
Adjustments from
 presentation of available-
for-sale securities at fair value             -             -              -              -         (10.1)             -          (10.1)
Translation differences
 relating to CPI-linked
 perpetual deposit (*)                        -             -              -           12.3             -              -           12.3
                                        -------       -------        -------        -------       -------        -------        -------

BALANCE AS AT
 DECEMBER 31, 2004                        131.4       1,068.0         (697.5)         202.5           0.3         (505.5)         199.2

CHANGES DURING 2005
Net loss                                      -             -              -              -             -           (8.4)          (8.4)
Adjustments from
 presentation of
 available--for-sale
 securities at fair value                     -             -              -              -           5.8              -            5.8
Translation differences
 relating to CPI-linked
 perpetual deposit (*)                        -             -              -            0.5             -              -            0.5
                                        -------       -------        -------        -------       -------        -------        -------

BALANCE AS AT
 DECEMBER 31, 2005                        131.4       1,068.0         (697.5)         203.0           6.1         (513.9)         197.1

CHANGES DURING 2006
Adjustments as at January 1, 2006
due to initial implementation of
Accounting Standard No. 22 (**)               -        (992.3)         697.5           90.7             -              -         (204.1)
                                        -------       -------        -------        -------       -------        -------        -------
Balance as at January 1,
 2006 following the
 implementation of
 Standard No. 22                          131.4          75.7              -          293.7           6.1         (513.9)          (7.0)
Net loss                                      -             -              -              -             -          (17.1)         (17.1)
Adjustments from
 presentation of available- for-
 sale securities at fair value                -             -              -              -           2.6              -            2.6
Translation differences
 relating to CPI-linked
 perpetual  deposit (*)                       -             -              -           41.5             -              -           41.5
                                        -------       -------        -------        -------       -------        -------        -------

BALANCE AS AT
 DECEMBER 31, 2006                        131.4          75.7              -          335.2           8.7         (531.0)          20.0
                                        =======       =======        =======        =======       =======        =======        =======

*    See Note 8 to the financial statements.

**   See Note 1D to the financial statements.

The accompanying notes are an integral part of the financial statements.

                                     F - 5
```

```

                               The Industrial Development Bank of Israel Limited

STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------

Reported amounts

                                                                        2006               2005               2004
                                                                     ----------         ----------         ----------
                                                                     NIS MILLIONS      NIS MILLIONS       NIS MILLIONS
                                                                     ----------         ----------         ----------

CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net earnings (loss) for the year                                          (17.1)              (8.4)               1.4
Adjustments to reconcile net earnings(loss) to net cash flows
 generated by operating activities:
Depreciation on equipment                                                   0.4                1.1                2.9
Allowance for doubtful debts                                               22.9               44.5               71.1
Gain on sale of available-for-sale securities                             (10.3)             (11.3)             (38.5)
Capital gain                                                                  -                  -               (0.2)
Provision for severance pay and pensions, net                              (0.6)               0.3               (7.0)
Inflationary erosion of capital notes and perpetual deposit                (1.8)               1.6               (2.3)
                                                                     ----------         ----------         ----------
Net cash  inflow (outflow) generated by operating activities               (6.5)              27.8               27.4
                                                                     ----------         ----------         ----------

CASH FLOWS GENERATED BY ACTIVITIES RELATED TO ASSETS:
Deposits with banks, net                                                    6.5                3.0                6.1
Available-for-sale securities, net                                         25.7               13.9               53.8
Credit to the public, net                                               1,139.6              269.2            1,124.5
Credit to governments, net                                                 17.5               13.7               32.5
Other assets, net                                                           3.5               10.4                2.2
Acquisition of fixed assets                                                (0.3)              (0.4)              (0.1)
Proceeds from sale of fixed assets                                            -                  -                0.2
                                                                     ----------         ----------         ----------
Net cash inflow generated by activities
 related to assets                                                      1,192.5              309.8            1,219.2
                                                                     ----------         ----------         ----------

CASH FLOWS GENERATED BY ACTIVITIES RELATED TO
 LIABILITIES AND SHAREHOLDERS' EQUITY:
Redemption of capital notes                                                (0.2)                 -               (0.6)
Deposits of the public, net                                              (111.3)            (227.1)            (214.7)
Deposits of banks, net                                                   (280.5)            (379.2)            (744.7)
Deposits of the Government, net                                          (795.6)             228.4             (294.7)
Other liabilities, net                                                      1.6               (1.7)             (11.8)
                                                                     ----------         ----------         ----------
Net cash outflow generated by activities
 relating to liabilities and shareholders' equity                      (1,186.0)            (379.6)          (1,266.5)
                                                                     ----------         ----------         ----------

DECREASE IN CASH                                                              -              (42.0)             (19.9)

BALANCE OF CASH AS AT BEGINNING OF YEAR                                    53.4               95.4              115.3
                                                                     ----------         ----------         ----------

BALANCE OF CASH AS AT END OF YEAR                                          53.4               53.4               95.4
                                                                     ==========         ==========         ==========

                                     F - 6
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

     A.   THE RUN OFF PLAN AND THE SPECIAL LINE OF CREDIT OF THE BANK OF ISRAEL

     Due to increased withdrawals of deposits of the public during the third
     quarter of 2002, the Bank experienced severe liquidity problems, following
     which the Bank turned to the Governor of the Bank of Israel on August 22,
     2002, with a request for a special line of credit.

     DECISIONS OF THE MINISTERIAL COMMITTEE FOR SOCIAL AND ECONOMIC AFFAIRS
     REGARDING APPROVAL AND EXTENSION OF THE RUN-OFF PLAN

     On October 10, 2005 the Ministerial Committee for Social and Economic
     Affairs (the Social Economic Cabinet) approved the extension of the Bank's
     Run-Off plan, after two years earlier, on July 29, 2003, it had decided to
     adopt it. The main principles of the Committee's decision from October 10,
     2005 are as follows:

          >>   The assets of the Bank are to be sold of in a supervised process
               and over a period ending by July 31, 2008, in the framework of
               the Run-Off plan approved by the Bank's Board of Directors and
               with the changes to be determined by the Accountant General and
               the Government Companies Authority.

          >>   The maximum amount of the special line of credit will at no time
               exceed NIS 1.25 billion and over the period of executing the
               Run-Off plan it will not exceed the amounts approved by the Bank
               of Israel.

          >>   The Bank will not use the special line of credit or other sources
               for the purpose of providing new credit.

          >>   The Government is responsible for the repayment of the special
               line of credit as from July 1, 2005, on the condition that the
               interest on the credit line until the end of the plan shall not
               exceed the Bank of Israel interest rate.

          >>   If at the end of the Run-Off plan, there remains an unpaid
               balance of the special line of credit, the Government will repay
               the balance to the Bank of Israel until July 31, 2008. The
               Government has noted before it the notice of the Governor of the
               Bank of Israel that in exchange for its repayment of the credit
               balance, the collateral that was provided by the Bank for
               repayment of the credit line will be assigned in its favor (the
               debenture dated November 14, 2002 by which the Bank created a
               general floating lien in favor of the Bank of Israel, which was
               amended on December 29, 2005).

     It is the understanding of the Bank that the Government's assuming
     responsibility for the repayment of the special line of credit does not
     derogate from the primary obligation of the Bank to repay the balance of
     the special line of credit to the Bank of Israel.

     The Bank is presently in the process of implementing the Run-Off plan as
     described in more detail below.

     THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL

     Following the liquidity problems encountered by the Bank in the third
     quarter of 2002, the Bank of Israel had provided it a special line of
     credit, which was extended until July 31, 2008 in accordance with the
     letter of the Governor from October 30, 2005. The terms of the special line
     of credit were determined by the Governor of the Bank of Israel and over
     time they underwent changes. The present terms of the special line of
     credit are specified in the letter of the Governor from October 30, 2005,
     and the principal terms are as follows:

                                     F - 7
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     >>   The credit line will be in effect until no later than July 31, 2008.

     >>   The maximum amount of the credit line will at no time exceed NIS 1.25
          billion and it will decline in accordance with a forecast that was
          attached to the notice of the Governor of the Bank of Israel regarding
          extension of the line until July 31, 2008.

     >>   The Bank will be allowed to continue to use the credit line in order
          to meet the liquidity needs it has for fulfilling its current banking
          obligations.

     >>   The interest on the utilized credit will be the "Bank of Israel
          interest rate" (it is noted that before July 29, 2003 the utilized
          credit bore a higher rate of interest).

     >>   Any significant administrative expense that deviates from the Bank's
          ordinary course of business and has an effect on its business results
          will require the approval of the Bank of Israel.

     >>   Limitations were set on the Bank's volume of activity with respect to
          making and pledging deposits with banks.

     In his letter from October 30, 2005, the Governor of the Bank of Israel
     clarified that if the Bank of Israel should see fit, and to the extent
     required at its sole discretion, additional restrictions regarding the
     Bank's operations besides those specified in the aforementioned letter will
     be considered, whether or not as a result of non-conformity with the
     objectives of the Run-Off plan.

     The utilized balance of the special line of credit of the Bank of Israel
     (not including accrued interest) was NIS 751 million as at December 31,
     2006 (compared with NIS 1,028 million as at December 31, 2005).

     THE COMPONENTS OF THE RUN-OFF PLAN

     The principal components of the Run-Off plan that was approved by the
     Bank's Board of Directors are a supervised sale of the Bank's assets by the
     end of the plan period and a significant reduction in manpower and in
     operating expenses, subject to the continued granting of the special line
     of credit by the Bank of Israel. As a part of this process the Bank also
     implemented an extensive and detailed efficiency plan.

     In accordance with the Run-Off plan and the complementary efficiency plan
     implemented by the Bank, the Bank refrains from granting new credit and
     concentrates its activities on collecting the existing credit.

     As part of the implementation of its plans, the Bank has significantly
     reduced or completely discontinued the following activities: foreign
     currency and foreign trade activity, maintenance of a dealing room,
     maintenance of current accounts, checking accounts and securities accounts,
     processing grants, operating cash and clearing facilities (independently)
     and credit cards. The Bank also refrains from accepting new deposits and
     (subject to certain exceptions) from renewing existing deposits that reach
     maturity.

     The reduction in the Bank's operations was also accompanied by a reduction
     in the Bank's staff.

                                     F - 8
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     On July 26, 2005 the Bank's Board of Directors discussed a document that
     had been prepared regarding the extension of the Run-Off plan. In light of
     the document's conclusion regarding the advantages of extending the plan,
     the Board of Directors approved extension of the plan until July 31, 2008.

     The Bank's Board of Directors also decided on the same occasion that due to
     the reduction in the Bank's activity according to the Run-Off plan and the
     date to which the plan was extended, the Bank would notify the Governor of
     the Bank of Israel that it agrees that its banking license be restricted in
     a manner that reflects its reduced activity as derived from the Run-Off
     plan, and to the restricted license specifying that it is valid until the
     end of the plan (July 31, 2008).

     In his letter from January 29, 2006 the Bank was notified by the Governor
     of the Bank of Israel as follows:

          >>   The banking license the Bank received on June 4, 1989 will be
               restricted so that the Bank cannot engage in any business it did
               not engage in prior to the date of the license (until the date of
               the license the Bank engaged in financing investments) and
               without derogating from the generality of the aforementioned, the
               Bank will not receive new deposits and will not renew deposits
               reaching their current date of maturity, other than from the
               shareholders.

          >>   The Bank's banking license will be revoked as from August 1,
               2008.

     In his letter from May 1, 2007 the Governor of the Bank of Israel notified
     that if the possible blueprint, mentioned below, for the sale and/or
     transfer of the shares of the Bank, would be executed before August 1,
     2008, the Bank's banking license will be revoked as from that date.

     The ability of the Bank to repay its liabilities is contingent upon the
     continuation of the special line of credit from the Bank of Israel and
     implementation of the decision of the Ministerial Committee for Social and
     Economic Affairs regarding the Run-Off plan.

     The financial statements do not contain any changes in the value and
     classification of assets and liabilities that may be needed when the Bank
     ceases operating as a banking entity.

     POSSIBLE BLUEPRINT FOR THE SALE AND/OR TRANSFER OF THE SHARES OF THE BANK

     The Ministry of Finance and the Government Companies Authority have been
     assessing a possible blueprint for the sale and/or transfer of all of the
     issued share capital of the Bank to a third party purchaser, and this by:
     (a) Sale and/or transfer of all of the holdings of the State and the three
     large banking groups in the Bank's shares to a designated purchaser; (b)
     The purchase by the designated purchaser of the shares of the Bank held by
     the public and traded on the Tel Aviv Stock Exchange, and this within the
     framework of an arrangement plan pursuant to article 350 of the Companies
     Law, 1999 that requires court-approval and a special majority of the Bank's
     public shareholders for its implementation; and, (c) The redemption by the
     Bank of the "D" and "DD" preference shares held by the public, including
     the payment of the preferred dividends in arrears for these shares (as
     required by the terms of their offering in the event of a redemption).

     As part of the assessment of the blueprint, the Government Companies
     Authority publicized on June 17, 2007 a request for information
     (hereinafter - "RFI") within the framework of which parties interested in
     purchasing the shares of the Bank will be invited to give notice of their
     interest in the purchase pursuant to the proposed blueprint. On July 4,
     2007, the Government Companies Authority advised the Bank that it has
     received eleven applications from companies and individuals in response to
     the RFI and that these applications will be reviewed in the near future.

                                     F - 9
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     It should be clarified, at this stage it is not known if the blueprint
     currently under examination will in fact be adopted and implemented. This
     question will be affected by, among other things, the response and replies
     to the RFI and the willingness of the three banking groups to transfer
     their holdings. In addition, the sale of the State's holdings in the Bank
     requires a privatization resolution by the Ministerial Committee for
     Privatization Matters, a resolution which has yet to be adopted.

     B.   DEFINITIONS

     In these financial statements -

     ADJUSTED AMOUNT - The nominal historical amount adjusted to the effect of
     the changes in the general purchasing power of the Israeli currency in
     accordance with the opinions of the Institute of Certified Public
     Accountants in Israel.

     REPORTED AMOUNT - The adjusted amount as at the date of transition with the
     addition of amounts in nominal values that were added after the date of
     transition and less amounts subtracted after the date of transition.

     DATE OF TRANSITION - December 31, 2003.

     ADJUSTED FINANCIAL REPORTING - Financial reporting in amounts adjusted to
     the effect of the changes in the general purchasing power of the Israeli
     currency in accordance with the opinions of the Institute of Certified
     Public Accountants in Israel.

     C.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS

     GENERAL

     The financial statements have been prepared in accordance with directives
     and guidelines of the Supervisor of Banks in Israel and in accordance with
     Israeli generally accepted accounting principles.

     In October 2001 the Israel Accounting Standards Board published Accounting
     Standard No. 12, "Discontinuance of Adjustment of Financial Statements".
     Pursuant to this standard and in accordance with Accounting Standard No. 17
     that was published in December 2002, the adjustment of financial statements
     will be discontinued as at January 1, 2004. Until December 31, 2003, the
     Bank continued to prepare adjusted financial statements in accordance with
     the directives of the Supervisor of Banks, on the basis of the principles
     of the Opinion No. 36 of the Institute of Certified Public Accountants in
     Israel. The adjusted amounts presented in the financial statements as at
     December 31, 2003 are the basis for the financial statements in reported
     amounts. Any additions made during the period are included according to
     their nominal values.

     BALANCE SHEET

     Non-monetary items are stated at reported amounts.

     Monetary items are stated in the balance sheet at their nominal historical
     values as at balance sheet date.

                                     F - 10
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     C.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS (CONT'D)

     Amounts of non-monetary assets do not necessarily reflect their realizable
     value or current economic value, but only the reported amounts of such
     assets.

     The term "cost" in these financial statements means the reported amount of
     cost.

     STATEMENTS OF INCOME

     Income and expenses deriving from non-monetary items or from provisions
     included in the balance sheet are derived from the difference between the
     reported amount of the opening balance and the reported amount of the
     closing balance. All other operating items are stated at their nominal
     historical values.

     D.   STATEMENT OF SHAREHOLDERS' EQUITY

     On January 1, 2006, the Bank implemented for the first time accounting
     Standard No. 22, "Financial Instruments: Disclosure and Presentation"
     (hereinafter - the "Standard"). The Standard sets forth the rules for
     presenting financial instruments in the financial statements and details
     the proper disclosure required in respect thereof. In addition, the
     Standard stipulates the manner for classifying financial instruments as
     financial liabilities and as shareholders' equity, for classifyingthe
     interest, dividends, and related losses and gains, and the circumstances
     under which an entity can set off financial assets and liabilities. The
     Standard annuls Opinion No. 53, "The Accounting Treatment of Convertible
     Liabilities" and Opinion No. 48, "The Accounting Treatment of Option
     Warrants".

     In respect of certain issues relating to the aforementioned treatment,
     there exist directives of the Supervisor of Banks. In such cases, the Bank
     is subject to those directives.

     The transition to the Standard resulted in a reduction in shareholders'
     equity in an amount of NIS 204.1 million, as a result of the classification
     of participating preference shares of Class C, CC, and CC1 which were
     previously classified as shareholders' equity, as a liability under the
     item of "Participating preference shares".

     Adoption of the Standard was prospective. The comparative data presented in
     the financial statements relating to previous periods were not restated.

     The difference generated until May 6, 1996 between the adjustment of the
     perpetual deposit with the Israeli Treasury which, up to May 6, 1996, was
     linked to the exchange rate of the US dollar, in respect of the
     participating preference shares similarly linked to the exchange rate of
     the US dollar, and the adjustment of the said deposit on the basis of the
     CPI, is reflected in the statement of shareholders' equity in the item
     entitled "Accumulated difference on translation of a dollar linked
     deposit".

     Further to the initial implementation of Standard No. 22, the balance of
     the accumulated difference from the dollar-linked deposit was cancelled as
     from January 1, 2006, due to the fact that the participating preference
     shares were classified as a liability under the item of "Participating
     preference shares" and are measured, as from that date, on the basis of
     their monetary dollar-linked value (see Note 8).

                                     F - 11
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     The difference generated from May 7, 1996, between the adjustment of the
     special deposit with the Israeli Treasury, linked from that date to the CPI
     (which in no event will be less than its dollar value as it was on October
     1, 1987) and the adjustment of the non-participating shares linked to the
     exchange rate of the dollar, is reflected in the statement of shareholders'
     equity in the item entitled "Accumulated difference on translation of
     CPI-linked deposit" (see Note 8).

     E.   EXCHANGE RATES AND LINKAGE

     (1)  Assets and liabilities denominated in, or linked to, foreign currency,
          except for investments in securities, are stated on the basis of the
          representative exchange rates, published by the Bank of Israel, in
          effect on balance sheet date or on a date relevant to the particular
          transaction.

     (2)  Assets and liabilities linked to the CPI are stated according to the
          contractual linkage terms of each balance.

     (3)  Assets and liabilities, which are optionally linked to the CPI or to
          foreign currency, are stated in the financial statements using the
          relevant basis under the terms of the respective transactions.

     (4)  Interest and linkage differences accrued in respect of assets and
          liabilities are included in the balance sheet under the items to which
          they relate.

     (5)  Following are details of exchange rates and the CPI and the rates of
          change therein:

                                  DECEMBER 31                         RATE OF CHANGE DURING
                     -----------------------------------       ------------------------------------
                      2006           2005          2004         2006           2005          2004
                     -------       -------       -------       -------        -------       -------
                                                                  %              %             %
                                                               -------        -------       -------

Representative
 exchange rate
 of US$1
 (in NIS)              4.225         4.603         4.308          (8.2)           6.8          (1.6)

CPI in points
 for:
 December              184.9         185.0         180.7          (0.1)           2.4           1.2

 November              184.9         185.4         180.6          (0.3)           2.7           1.0

     F.   SECURITIES

     In accordance with the directives of the Supervisor of Banks securities are
     to be classified into three groups, and principles of measurement were
     provided for each group as follows:

     HELD-TO-MATURITY DEBENTURES

     Such debentures are stated at their adjusted value as at balance sheet
     date. Such value represents the par value plus linkage increments and
     interest accrued since acquisition and it also includes the unamortized
     discount or premium, generated upon acquisition and not yet amortized.
     Income from held-to-maturity debentures is recognized on the accrual basis.

                                     F - 12
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     AVAILABLE-FOR-SALE SECURITIES

     Such securities are stated at their fair value. Income therefrom is
     recognized on the accrual basis. The difference between the fair value and
     adjusted value of available-for-sale securities, net of the related tax
     effect, is recorded as a capital reserve. Non-marketable shares are stated
     at their reported cost.

     F.   SECURITIES (CONT'D)

     SECURITIES FOR TRADING

     Such securities are stated at their fair value, and income resulting from
     such adjustment is recognized on a current basis. The fair value of
     securities for trading is determined based on their stock market prices as
     at balance sheet date.

     IMPAIRMENT IN VALUE OF INVESTMENTS

     From time to time the bank examines whether there has been an impairment in
     the value of its investments in securities which is not of a temporary
     nature. This examination is performed when there are signs that may
     indicate the possibility of an impairment in the value of an investment,
     including a decline in their stock market prices, the business of the
     investee, the industry in which the investee operates and additional
     parameters. Provisions for the adjustment in value of these investments,
     which in accordance with the opinion of the Management are based on an
     examination of the overall relevant aspects and the significance of each,
     and which are not of a temporary nature, are recorded in the statement of
     income.

     G.   ALLOWANCE FOR DOUBTFUL DEBTS

     The financial statements include specific allowances for doubtful debts,
     which, in Management's opinion, fairly present the anticipated loss on the
     credit portfolio, including off-balance sheet credit.

     In determining the allowances, Management performed its evaluation of the
     risk involved in the credit portfolio using available information on the
     customers' financial position, volume of activity, past record and adequacy
     of the collaterals received.

     The directives of the Supervisor of Banks require that, commencing with
     1992, banks include, in addition to the specific allowance for doubtful
     debts, a supplementary allowance for doubtful debts, which replaces the
     general allowance, which had been required up to that time. The
     supplementary allowance for doubtful debts is based upon excessive credit
     balances, measured according to specified quality characteristics of the
     credit portfolio, as provided in the directives of the Supervisor of Banks.
     In accordance with the aforementioned requirements, a portion of the
     general allowance, as at December 31, 1991, equal to 1% of the total debt
     to which it was related at that date, is to be maintained in inflation
     adjusted values. According to a directive of the Supervisor of Banks the
     adjustment to inflation of the general allowance was discontinued as at
     January 1, 2005.

     According to Directive 315 of Proper Banking Procedures, a banking
     corporation must record a supplementary allowance for doubtful debts in
     respect of debts of customers which deviate from limits stipulated by the
     Supervisor of Banks, which are calculated as a certain percentage of the
     Bank's capital, as stipulated for purposes of calculating the minimum
     capital ratio. These limits relate to the indebtedness of an individual
     borrower or a borrower group, to the indebtedness in respect of financing
     the acquisition of means of control of corporate entities and to the
     indebtedness of related parties.

                                     F - 13
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     As a result of the decline in the "first tier capital" of the Bank and the
     limitation on the amount of "second tier capital" that may be taken into
     consideration, a large part of the customers' debts to the Bank exceed the
     amounts of the aforementioned limits.

     G.   ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)

     Furthermore, Directive 315 of the Proper Banking Procedures provides that a
     banking corporation is required to make a supplementary allowance for
     doubtful debts if the total liabilities of a certain sector to the banking
     corporation exceed 20% of the total liabilities of the public to the
     banking corporation (hereinafter - "the limit on sector indebtedness").

     Since the Bank has stopped providing new credit and is focusing on the
     collection of the existing credit to its customers, its ability to spread
     the indebtedness of its customers between the various sectors has decreased
     and it may on occasion deviate from the limit on sector indebtedness.

     The Bank applied to the Bank of Israel requesting an exemption from
     recording the supplementary allowance for doubtful debts deriving from
     deviations from the aforementioned various debt limits.

     In his letters dated May 28, 2003 and August 21, 2003, the Supervisor of
     Banks exempted the Bank from the requirement to increase the supplementary
     allowance for doubtful debts in its financial statements as at March 31,
     2003 and June 30, 2003, in respect of deviations from the debt limits of an
     individual borrower and a borrower group and in respect of deviations from
     limits in respect of financing means of control in corporate entities.

     In his letter of November 26, 2003, the Supervisor of Banks announced that
     in light of the Government's decision on the affairs of the Bank, the
     Bank's plan to reduce its activity and the commitment of the Government to
     repay the special line of credit, which was granted to the Bank by the Bank
     of Israel and which is being used by the Bank to repay its liabilities to
     its depositors, he approves the following reliefs with respect to
     implementation of the Proper Banking Procedures:

     A.   As from the financial statements as at September 30, 2003 and
          thereafter, the Bank is exempt from increasing the supplementary
          allowance for doubtful debts in respect of deviations from debt limits
          of an individual borrower and a borrower group and deviations from
          debt limits in respect of financing means of control in corporate
          entities, and in respect of deviations from the limit of sector
          indebtedness.

     B.   The Bank is allowed to reduce the supplementary allowance it recorded
          in respect of the deviation from the aforementioned limits in the last
          quarter of 2002.

     C.   The Bank is allowed to reduce the supplementary allowance it recorded
          in the past in respect of the deviation from indebtedness of related
          parties.

     Accordingly, in the Bank's financial statements as at December 31, 2003, a
     supplementary allowance for doubtful debts in respect of deviations from
     the aforementioned limits was not included, and the supplementary allowance
     for doubtful debts in the amount of NIS 7.5 million that was included in
     the financial statements of the Bank as at December 31, 2002 and
     thereafter, in respect of the deviation from these limits, was cancelled in
     the third quarter of 2003.

                                     F - 14
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     It is noted that if the Supervisor of Banks had not granted the exemption,
     the Bank would have been required to record a supplementary allowance in
     significant amounts in respect of these deviations, which would have had a
     material impact on its financial results for those periods. In addition,
     the adjustment of the supplementary allowance for changes occurring from
     time to time in the volume of the deviations would have impacted on the
     financial results of the Bank in the subsequent reporting periods.

     G.   ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)

     The aggregate balance of the general allowance and the supplementary
     allowance for doubtful debts in accordance with the directives of the Bank
     of Israel, as at December 31, 2006, constitutes 4.82% of the credit to the
     public risk, which includes credit risk and off-balance sheet credit risk
     less credit covered by collateral that is deductible for purposes of
     individual borrower and borrower group limitations (December 31, 2005 -
     3.81%).

     The Bank's policy is not to write-off doubtful debts until all collection
     efforts, with respect thereto, have been exhausted. If Management concludes
     that recovery of a debt is no longer possible, then cases involving
     significant amounts are brought before the authorized bodies of the Bank,
     which decide upon their being written-off.

     H.   FIXED ASSETS

     Fixed assets are stated at cost net of accumulated depreciation.
     Depreciation is calculated using the "straight-line" method, at rates
     deemed adequate to amortize the assets over their estimated useful lives.

     I.   CONTINGENT LIABILITIES

     The accounting treatment of contingent legal claims is based on an opinion,
     received by management of the Bank from its legal counsel and upon which it
     relies, which provides the probability of occurrence of the exposure to
     risk relating to contingent claims. The claims were classified in
     accordance with the probability ranges of occurrence of the exposure to
     risk as follows:

     1)   Probable - when the probability is over 70%.

     2)   Reasonably possible - when the probability is over 20% and less than
          or equal to 70%.

     3)   Remote - when the probability is less than or equal to 20%.

     Only in rare cases is a banking institution allowed to state in the
     financial statements that in the opinion of the bank's management, based
     upon consultation with its legal counsel, it is unable to evaluate the
     probability of realization of the exposure to risk in respect of a claim
     for which a petition was filed to have the claim certified as a class
     action, and this in the four financial statements that are published after
     the filing of the petition. The Bank has provided disclosure with respect
     to material legal proceedings pending against the Bank. Note 21D provides
     disclosure regarding contingencies in respect of which the risk of
     occurrence of the exposure is not remote and for which no provision was
     made. The financial statements include appropriate provisions in respect of
     claims which in the opinion of management of the Bank will not be rejected
     or cancelled and the risk of their occurrence is probable.

     J.   BASIS OF RECOGNITION OF INCOME AND EXPENSES

     (1)  Income and expenses are recognized on the accrual basis.

     (2)  As to the policy of recognition of income and expenses with respect to
          securities for trading and derivative financial instruments defined as
          other transactions, see F and L, respectively.

                                     F - 15
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     K.   EMPLOYEE RIGHTS

     Appropriate provisions cover the Bank's liability for payment of severance
     pay and other benefits to its employees, according to labor agreements.

     In December 2002, the Bank, the General Federation of Labor and the Bank's
     employee committee signed a special collective agreement regarding a
     reduction in the number of the Bank's employees. According to this
     agreement some of the employees are entitled to a pension as from the date
     of termination of their employment. In respect of such employees, the Bank
     signed an agreement with a pension fund which arranges the payment of the
     pensions. In accordance with the agreements, on the date on which the
     employment of each such employee is terminated, the Bank deposits with the
     pension fund the amount required in order to purchase the pension rights
     for the employee. The Bank included a provision in respect of the
     anticipated cost of acquisition of the pension rights, as calculated in an
     opinion prepared by a pension expert.

     L.   DERIVATIVE FINANCIAL INSTRUMENTS

     The Bank implements the directives of the Supervisor of Banks regarding
     derivative financial instruments and hedging activities. The directives are
     based on the principles stipulated in U.S. Accounting Standard FAS 133. In
     accordance with these directives, the Bank presents all the derivative
     instruments, including certain derivative instruments embedded in other
     contracts, as assets or liabilities in the balance sheet and measures them
     according to fair value. The Bank does not apply hedge accounting. The
     changes in the fair value of all derivative instruments are recorded in the
     statement of income.

     M.   OFF-SETTING OF FINANCIAL INSTRUMENTS

     Pursuant to the guidelines, amounts of designated deposits, the repayment
     of which to the depositor is contingent on the collection of the loans
     granted therefrom, are offset against the amounts of the related loans and,
     therefore, are not reflected in the balance sheet. Income earned from such
     collection-based loan operations is classified as operating commissions.

     In accordance with the directives of the Supervisor of Banks, assets and
     liabilities in respect of financial instruments with the same counter party
     are set-off against one another and presented net in the balance sheet when
     the following cumulative conditions are fulfilled:

     (1)  In respect of such liabilities the Bank has the legal right to enforce
          the set-off of the liabilities from the assets.

     (2)  The Bank intends to pay the liabilities and realize the assets on a
          net basis or simultaneously.

                                     F - 16
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     N.   TAXES ON INCOME

     The provision for taxes on the income of the Bank, which is defined as a
     "financial institution" for Value Added Tax (hereinafter - VAT) purposes,
     includes VAT on profit in accordance with the Value Added Tax Law. VAT
     levied on salaries paid by financial institutions is included in the
     statement of income under the item of "Salaries and related expenses". In
     the years 2002 through 2006, "Salaries and related expenses" did not
     include an expense in respect of salary VAT, due to losses for purposes of
     VAT on profit.

     O.   STATEMENT OF CASH FLOWS

     Cash flows from activity in assets and liabilities are presented on a net
     basis, except for the changes in securities, fixed assets, and capital
     notes. "Cash", for purposes of the cash flow statement, includes cash
     balances and cash deposits with banks for an initial period not exceeding
     three months.

     P.   USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires Management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     the disclosure in respect of contingent assets and liabilities as at the
     date of the financial statements and the reported amounts of income and
     expenses during the reported period. Actual results may differ from such
     estimates.

     Q.   EARNINGS PER SHARE

     Commencing on January 1, 2006, the Bank implemented Accounting Standard No.
     21 "Earnings Per Share" (hereinafter: "the Standard") of the Israel
     Accounting Standards Board. This Standard, which is based on International
     Accounting Standard No. 33, replaces Opinion No. 55 of the Institute of
     Certified Public Accountants in Israel on this issue and sets out new rules
     regarding the calculation of earnings per share and the presentation
     thereof in the financial statements. According to the provisions of the
     Standard, the Bank computes earnings per share in respect of the earnings
     or loss from continuing operations attributable to ordinary shareholders.
     Earnings per share is computed by dividing the earnings or loss
     attributable solely to the ordinary shareholders, by the weighted average
     number of ordinary shares outstanding during the reported period. In the
     past, earnings per share was computed in relation to an amount which equals
     US$1 of the par value of the shares, according to the basic exchange rate
     to which they are linked. Comparative data of earnings per share in these
     financial statements were restated in respect of the retroactive
     implementation of the calculation provisions of the new standard.

     R.   IMPAIRMENT OF ASSETS

     Accounting Standard No. 15, "Impairment in value of assets" stipulates the
     procedures to be implemented by the corporation in order to ensure that its
     assets in the balance sheet are not presented at amounts higher than their
     recoverable value. Such value is the higher of the net selling price and
     the present value of the estimated future cash flows expected to be
     generated from the use and disposal of the asset. The Standard also
     stipulates rules of presentation and disclosure regarding assets whose
     value has been impaired.

                                     F - 17
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     S.   BUSINESS SEGMENTS

     In accordance with an approval received from Bank of Israel, the Bank is
     not required to report according to business segments.

     T.   DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
          PRIOR TO THEIR APPLICATION

     1.   In July 2006, the Israel Accounting Standards Board issued Accounting
          Standard No. 29, "Adoption of International Financial Reporting
          Standards ("IFRS")" (hereinafter - the "Standard"). The Standard
          provides that entities subject to the Securities Law - 1968 that are
          required to report according to the regulations of this law, are to
          prepare their financial statements for periods beginning as from
          January 1, 2008 according to IFRS. This does not apply to banking
          institutions, whose financial statements are presented in accordance
          with the directives and guidelines of the Supervisor of Banks.

          In addressing the manner in which the Standard is to be implemented by
          banking institutions, the Supervisor of Banks notified the banking
          institutions that:

          a.   He intends on regularly issuing directives for the implementation
               of Israeli standards issued by the Israel Accounting Standards
               Board, which are based on IFRS, that do not relate to the core
               banking business.

          b.   In the second half of 2009 he will render his decision regarding
               the date of implementation of IFRS that relate to the core
               banking business, taking into account the results of the process
               of adoption of these standards in Israel on the one hand and the
               progress of the process of convergence of IFRS and U.S. standards
               on the other.

          c.   Therefore, as regards the core banking business, the financial
               statements of a banking institution presented in accordance with
               the directives and guidelines of the Supervisor of Banks will
               continue to be presented on the basis of U.S. standards that were
               set out in the Public Reporting Directives.

     2.   In December 2006, the Israel Accounting Standards Board published
          Accounting Standard No. 23, "The Accounting Treatment of Transactions
          between an Entity and Its Controlling Shareholder" (hereinafter - the
          "Standard"). The Standard replaces the Securities Regulations
          (Financial Statement Presentation of Transactions between a company
          and its Controlling Shareholder) - 1996 as adopted in the Public
          Reporting Directives of the Supervisor of Banks. The Standard
          stipulates that assets and liabilities that were included in a
          transaction between the entity and its controlling shareholder shall
          be measured at the date of the transaction at fair value and that the
          difference between the fair value and the consideration from the
          transaction shall be included in shareholders' equity. A debit
          difference is in essence a dividend, and accordingly reduces the
          retained earnings. A credit difference is in essence an investment of
          the shareholder and shall therefore be presented under a separate item
          in shareholders' equity entitled "Capital reserve from a transaction
          between the entity and its controlling shareholder".

                                     F - 18
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     T.   DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
          PRIOR TO THEIR APPLICATION (CONT'D)

          The Standard discusses three issues relating to transactions between
          an entity and its controlling shareholder, as follows: the transfer of
          an asset from the controlling shareholder to the entity or
          alternatively, the transfer of an asset from the entity to the
          controlling shareholder; the controlling shareholder's assumption of a
          liability, to a third party, in whole or in part, on behalf of the
          entity, the indemnification of the entity by the controlling
          shareholder in respect of an expense, or the controlling shareholder
          waiving the entity's debt to it, in whole or in part:; and loans
          granted to the controlling shareholder or received from the
          controlling shareholder. In addition, the Standard stipulates the
          disclosure that shall be made in the financial statements in
          connection with transactions between the entity and its controlling
          shareholder during the period.

          The Standard applies to transactions between an entity and its
          controlling shareholder that were made after January 1, 2007, as well
          as to loans granted to or received from a controlling shareholder
          prior to the effective date of the Standard, as of the effective date.

          As at the date of the release of the financial statements, the
          Supervisor of Banks has not yet issued a directive regarding the
          manner of adoption of the Standard by banking institutions, if at all.

NOTE 2 - CASH AND DEPOSITS WITH BANKS

                                                       DECEMBER 31        DECEMBER 31
                                                          2006               2005
                                                        ----------        ----------
                                                        REPORTED           REPORTED
                                                         AMOUNTS            AMOUNTS
                                                        ----------        ----------
                                                       NIS MILLIONS       NIS MILLIONS
                                                        ----------        ----------

Cash and deposits with the Bank of Israel                      8.1              12.8
Deposits with commercial banks (1)                            50.6              48.4
Deposits in special banking corporations                       7.7              11.7
                                                        ----------        ----------

Total                                                         66.4              72.9
                                                        ==========        ==========

Including cash, deposits with the Bank of Israel
 and with banks for an initial period not
 exceeding three months                                       53.4              53.4
                                                        ==========        ==========

     (1)  As to a pledge on deposits with commercial banks - see Note 17 below.

                                     F - 19
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 3 - SECURITIES

     A.   COMPOSITION

                                                       DECEMBER 31, 2006
                            ------------------------------------------------------------------------
                                                          NON-REALIZED   NON-REALIZED
                                                           GAINS FROM     LOSSES FROM
                            CARRYING        ADJUSTED     ADJUSTMENTS TO  ADJUSTMENTS TO      FAIR
                              VALUE         VALUE (1)      FAIR VALUE      FAIR VALUE       VALUE (2)
                            --------        --------        --------        --------        --------
                                                        REPORTED AMOUNTS
                            ------------------------------------------------------------------------
                                                          NIS MILLIONS
                            ------------------------------------------------------------------------

AVAILABLE-FOR-
 SALE SECURITIES

Other debentures                 0.7             0.7               -               -             0.7
Shares of others                49.7            41.0             8.7               -         (3)49.7
                            --------        --------        --------        --------        --------
Total available-
 for-sale securities            50.4            41.7          (4)8.7               -            50.4
                            --------        --------        --------        --------        --------

Total securities                50.4            41.7             8.7               -         (3)50.4
                            ========        ========        ========        ========        ========

                                                       DECEMBER 31, 2005
                            ------------------------------------------------------------------------
                                                          NON-REALIZED   NON-REALIZED
                                                           GAINS FROM     LOSSES FROM
                            CARRYING        ADJUSTED     ADJUSTMENTS TO  ADJUSTMENTS TO      FAIR
                              VALUE         VALUE (1)      FAIR VALUE      FAIR VALUE       VALUE (2)
                            --------        --------        --------        --------        --------
                                                        REPORTED AMOUNTS
                            ------------------------------------------------------------------------
                                                          NIS MILLIONS
                            ------------------------------------------------------------------------

AVAILABLE-FOR-
 SALE SECURITIES

Other debentures                 2.6             2.6               -               -             2.6
Shares of others                60.6            54.5             6.1               -         (3)60.6
                            --------        --------        --------        --------        --------
Total available-
 for-sale securities            63.2            57.1          (4)6.1               -            63.2
                            --------        --------        --------        --------        --------

Total securities                63.2            57.1             6.1               -         (3)63.2
                            ========        ========        ========        ========        ========

     (1)  In the case of shares - cost less provision for impairment in value,
          where required.

     (2)  Fair value data are based, generally, on stock market prices, which do
          not necessarily reflect the price which would be received on the sale
          of a large quantity of shares.

     (3)  Includes shares, the fair value of which is not readily determinable,
          which are stated at adjusted value in the amount of NIS 16.7 million
          (December 31, 2005 - NIS 29.6 million).

     (4)  Included in shareholders' equity in the category "adjustments from
          presentation of available-for-sale securities at fair value".

     B.   See Note 4E regarding the classification of a customer's debt to the
          securities item.

     NOTE: For details regarding the results of investments in debentures - see
           Note 23E, and for details regarding the results of investments in
           shares - see Note 25.

                                     F - 20
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (1)

     A.   COMPOSITION

                                                 DECEMBER 31        DECEMBER 31
                                                    2006               2005
                                                 ----------         ----------
                                                       REPORTED AMOUNTS
                                                 -----------------------------
                                                NIS MILLIONS       NIS MILLIONS
                                                 ----------         ----------

Credit                                              6,570.8            7,738.3
General and supplementary allowances for
 doubtful debts (1)                                    51.7               57.6
                                                 ----------         ----------

Total                                               6,519.1            7,680.7
                                                 ==========         ==========

     B.   CREDIT TO THE PUBLIC INCLUDES:

     1.   CREDIT TO PROBLEMATIC BORROWERS (2) WHICH ARE NOT INCLUDED IN THE
          AGRICULTURAL SECTOR AND ARE NOT LOCAL AUTHORITIES

                                                                                  DECEMBER 31   DECEMBER 31
                                                                                     2006          2005
                                                                                  ----------    ----------
                                                                                      REPORTED AMOUNTS
                                                                                  ------------------------
                                                                                 NIS MILLIONS  NIS MILLIONS
                                                                                  ----------    ----------

     a.   Non-income bearing credit to problematic borrowers -
          Unlinked Israeli currency                                                    123.7         180.3
          Israeli currency linked to the CPI                                             7.0          27.9
          Denominated in or linked to foreign currency                                  10.9          22.0
                                                                                  ----------    ----------
                                                                                       141.6         230.2
                                                                                  ==========    ==========
     b.   Credit restructured during the year, without waiver of income -
          Unlinked Israeli currency                                                     21.7          47.5
          Israeli currency linked to the CPI                                            38.2          18.1
          Denominated in or linked to foreign currency                                   5.1          19.9

     c.   Credit to borrowers regarding which there is an as-yet
          unimplemented Management decision to restructure
          their debt                                                                    26.5           9.2

     d.   Credit temporarily in arrears                                                 14.5          60.5
          Interest income recorded in respect thereof                                    0.4           6.1

     e.   Credit under special supervision                                             156.2         221.3

     (1)  The specific allowance for doubtful debts was deducted from the
          relevant credit categories.

     (2)  The balance of problematic debts, less credit covered by collateral
          that is deductible for purposes of individual borrower and group of
          borrowers limitations.

                                     F - 21
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     B.   CREDIT TO THE PUBLIC INCLUDES: (CONT'D)

     2.   CREDIT TO THE AGRICULTURAL SECTOR

     In 1991, the Bank joined the Kibbutz Debt Arrangement, signed in 1989 by
     the banks, the Government and the Kibbutz movements. This Arrangement
     includes the implementation of a rehabilitation program prepared by the
     borrowers, the waiver by the Bank of part of the loans granted by it,
     Government grants designated for the early repayment of a part of the
     Kibbutz debts, and a rescheduling of another portion of the debts for a
     period of up to 25 years, in respect of which the Government provided less
     costly financing which leaves the Bank with a margin of 2% p.a.

     During 1991 through 1996, the Bank received from the Government the grants
     under the Kibbutz Arrangement of 1989, designated for the early repayment
     of the Kibbutz debts, as noted above, and reduced the outstanding Kibbutz
     debt accordingly. Furthermore, the Bank also received from the Government,
     the deposits required for the rescheduling of part of the Kibbutz debts in
     accordance with the Bank's proportionate share of the overall arrangement.

     In 1993, the Bank commenced the implementation of the Arrangement at the
     individual Kibbutz level for some Kibbutzim, reflecting the results thereof
     on its books.

     During 1996, a supplementary arrangement was signed by the banks, the
     Government and the Kibbutz movements for the arrangement of the debts of
     the Kibbutzim. In April 1999, an amendment to the supplementary arrangement
     was signed by the said parties. The main principles of the supplementary
     arrangement, including the amendment thereto, are as follows:

     -    The arrangement relates to a part of the Kibbutzim and organizations
          included in the first arrangement, in respect thereof it has become
          evident that after full execution of the financial arrangement
          contemplated by the first arrangement, debts remain regarding which
          the repayment ability envisioned, with respect thereto, under that
          agreement, does not allow them to fulfill their obligations (the
          "balloon" debt). Such "balloon" debt is to be written off.

     -    In respect of most of the "balloon" debts, the writing-off shall be
          covered as to 65% from bank sources and as to 35% from Government
          sources.

     -    Kibbutzim will assign part of their rights in land to the Israel Lands
          Administration. Upon each Kibbutz joining the arrangement, its land,
          which was found in the land survey to have an alternative value
          compared to agricultural use, will revert to the Israel Lands
          Administration, without attaching to it an obligatory price tag. A
          caveat is to be registered in favor of the banks with respect to such
          land. In the future, when the land is sold, part of the net proceeds
          to be received, which represents the value of the original rights of
          the Kibbutz in the land, will be paid over to the banks and the
          Government in proportion to their share in the writing-off of the
          debt, as stated above. The funds transferred by the Government for the
          purpose of the writing-off of the debts of each Kibbutz, as stated
          above, are conditional upon the consent of each individual Kibbutz to
          the said arrangement and its subsequent joining as a party to the
          supplementary arrangement, including the reversion of the land to the
          Israel Lands Administration. The abovementioned payments will be made
          in five annual installments: the first - an immediate payment and the
          remaining payments to be linked to the CPI with annual interest at a
          rate of 1.5%.

                                     F - 22
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     B.   CREDIT TO THE PUBLIC INCLUDES: (CONT'D)

     2.   CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)

     -    Until a real estate Kibbutz joins as party to the supplementary
          arrangement on the basis of the said land arrangement, the Kibbutz, at
          its own initiative, may enter into interim property transactions, the
          consideration for which, whether in cash or cash equivalents, will
          partially or fully serve as a substitute to the said land arrangement.
          The "balloon" debt balance of a potential real estate Kibbutz which is
          not repaid by the proceeds of such interim transactions or land
          arrangement, will be treated in accordance with the financial
          arrangement, as mentioned above.

          In the opinion of the Bank, in view of the above, uncertainty exists
          as to the real estate proceeds anticipated in the said arrangement.

          The Bank has recorded allowances for doubtful debts for all the
          amounts it considered necessary in light of that mentioned above.

          Composition of the credit to the agricultural sector:

                                                                     DECEMBER 31        DECEMBER 31
                                                                         2006              2005
                                                                     ----------         ----------
                                                                           REPORTED AMOUNTS
                                                                     -----------------------------
                                                                    NIS MILLIONS       NIS MILLIONS
                                                                     ----------         ----------

Kibbutzim (including regional enterprises and organizations)              202.5              245.0
Moshavim                                                                    6.4                9.2
                                                                     ----------         ----------
Total credit for kibbutzim and moshavim                                   208.9              254.2

Private agriculture                                                           -                2.5
                                                                     ----------         ----------

Total credit to the agricultural sector                                   208.9              256.7
                                                                     ==========         ==========

                                     F - 23
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     B.   CREDIT TO THE PUBLIC INCLUDES: (CONT'D)

     2.   CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)

     THE CREDIT (1) TO THE AGRICULTURAL SECTOR (2) INCLUDES:

                                                                                 DECEMBER 31        DECEMBER 31
                                                                                    2006                2005
                                                                                 ----------          ----------
                                                                                       REPORTED AMOUNTS
                                                                                 ------------------------------
                                                                                NIS MILLIONS       NIS MILLIONS
                                                                                 ----------          ----------

     a.     Non-income bearing loans to problematic borrowers -
            Unlinked Israeli currency                                                   1.3                 2.0
            Israeli currency linked to the CPI                                         28.3                34.5
            Denominated in or linked to foreign currency                                  -                 0.3
                                                                                 ----------          ----------
                                                                                       29.6                36.8
                                                                                 ==========          ==========
     b.     Restructured credit to borrowers-

            1.        Credit restructured during the current
                      year with waiver of income -
                      Israeli currency linked to the CPI                                6.8                 9.9
                      Average repayment period (years)                                  3.5                 4.0
                      Expected interest margin from the credit                            2%                  2%

            2.        Credit restructured in prior years
                      with waiver of income -
                      Israeli currency linked to the CPI                                2.3                 2.5

     c.     Credit to borrowers in respect of which
            there is an as-yet unimplemented
            management decision to restructure their debt                               0.4                 4.3

     d.     Credit temporarily in arrears                                                 -                 3.7
            Interest income recorded in the income statements
            in respect thereof                                                            -                 0.3

     e.     Credit under special supervision                                           52.3                61.5

     f.     Credit not included in above credit to problematic borrowers              117.5               138.0
            Interest income recorded in the income statements in respect
            thereof                                                                     5.2                10.0

     (1)  The balance of problematic debts less credit covered by collateral
          that is deductible for purposes of individual borrower and group of
          borrowers limitations.

     (2)  Including industrial enterprises and other organizations related to
          the Kibbutz sector.

                                     F - 24
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     B.   CREDIT TO THE PUBLIC INCLUDES: (CONT'D)

     3.   CREDIT TO LOCAL AUTHORITIES

     Following is the composition of credit to local authorities:

                                                                        DECEMBER 31  DECEMBER 31
                                                                            2006       2005
                                                                        ----------  ----------
                                                                            REPORTED AMOUNTS
                                                                        ----------------------
                                                                      NIS MILLIONS  NIS MILLIONS
                                                                        ----------  ----------

Balance of credit to local authorities at
 balance sheet date                                                            6.5         9.9

CREDIT (1) GRANTED TO LOCAL AUTHORITIES INCLUDES:

Credit not included in above credit to problematic borrowers                   6.5         9.9
  Interest income recorded in income statements with respect of
   such credit                                                                 0.5         0.9

     (1)  The balance of problematic debts less credit covered by collateral
          that is deductible for purposes of individual borrower and group of
          borrowers limitations.

                                     F - 25
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     C.   ALLOWANCE FOR DOUBTFUL DEBTS

                                                                                2006
                                                          --------------------------------------------------
                                                           SPECIFIC         SUPPLEMENTARY
                                                         ALLOWANCE (1)       ALLOWANCE (2)           TOTAL
                                                          ----------          ----------          ----------
                                                                           REPORTED AMOUNTS
                                                          --------------------------------------------------
                                                                             NIS MILLIONS
                                                          --------------------------------------------------

Balance of allowance at beginning of year                      675.6                57.6               733.2
                                                          ----------          ----------          ----------

Current allowances                                              40.8                   -                40.8
Reduction in allowances                                        (12.0)               (5.9)              (17.9)
Collection of debts written-off in previous years               (1.2)                  -                (1.2)
                                                          ----------          ----------          ----------
Amount charged to the income statement                          27.6                (5.9)               21.7
                                                          ----------          ----------          ----------

Debts written-off                                              (46.1)                  -               (46.1)
                                                          ----------          ----------          ----------

Balance of allowance at end of year                            658.3                51.7               710.0
                                                          ==========          ==========          ==========

Including amount of allowance not deducted from
credit to public                                                 1.9                   -                 1.9
                                                          ----------          ----------          ----------

                                                                                2005
                                                          --------------------------------------------------
                                                           SPECIFIC         SUPPLEMENTARY
                                                         ALLOWANCE (1)       ALLOWANCE (2)           TOTAL
                                                          ----------          ----------          ----------
                                                                           REPORTED AMOUNTS
                                                          --------------------------------------------------
                                                                             NIS MILLIONS
                                                          --------------------------------------------------

Balance of allowance at beginning of year                      714.4                69.6               784.0
                                                          ----------          ----------          ----------

Current allowances                                              82.9                   -                82.9
Reduction in allowances                                        (26.4)              (12.0)              (38.4)
Collection of debts written-off in previous years               (0.3)                  -                (0.3)
                                                          ----------          ----------          ----------
Amount charged to the income statement                          56.2               (12.0)               44.2
                                                          ----------          ----------          ----------

Debts written-off                                              (95.3)                  -               (95.3)
                                                          ----------          ----------          ----------

Balance of allowance at end of year                            675.6                57.6               733.2
                                                          ==========          ==========          ==========

Including amount of allowance not deducted from
credit to public                                                 1.0                   -                 1.0
                                                          ----------          ----------          ----------

     (1)  Not including allowance for interest on non-income bearing loans.

     (2)  Including a general allowance in accordance with the Bank of Israel
          directives in the total amount of NIS 38.9 million (as at December 31,
          2005 - NIS 38.9 million; as at December 31, 2004 - NIS 38.9 million).

                                     F - 26
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     C.   ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)

                                                                                2004
                                                          --------------------------------------------------
                                                           SPECIFIC         SUPPLEMENTARY
                                                         ALLOWANCE (1)       ALLOWANCE (2)           TOTAL
                                                          ----------          ----------          ----------
                                                                           REPORTED AMOUNTS
                                                          --------------------------------------------------
                                                                             NIS MILLIONS
                                                          --------------------------------------------------

Balance of allowance at beginning of year                      732.5                78.5               811.0
                                                          ----------          ----------          ----------

Current allowances                                              96.5                 3.4                99.9
Reduction in allowances                                        (16.5)              (12.3)              (28.8)
Collection of debts written-off in previous years               (0.9)                  -                (0.9)
                                                          ----------          ----------          ----------
Amount charged to the income statement                          79.1                (8.9)               70.2
                                                          ----------          ----------          ----------

Debts written-off                                              (98.1)                  -               (98.1)
                                                          ----------          ----------          ----------

Balance of allowance at end of year                            714.4                69.6               784.0
                                                          ==========          ==========          ==========

Including amount of allowance not deducted from
credit to public                                                 0.9                 0.9                 1.8
                                                          ----------          ----------          ----------

     (1)  Not including allowance for interest on non-income bearing loans.

     (2)  Including a general allowance in accordance with the Bank of Israel
          directives in the total amount of NIS 38.9 million (as at December 31,
          2005 - NIS 38.9 million; as at December 31, 2004 - NIS 38.9 million).

                                     F - 27
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     D.   CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
          SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
          BORROWER

                                                    DECEMBER 31, 2006
                                    ------------------------------------------------
                                    NUMBER OF                                CREDIT
                                   BORROWERS (3)        CREDIT (1)          RISK (2)
                                    ----------         ----------         ----------
AMOUNT OF CREDIT PER BORROWER                       REPORTED AMOUNTS
-----------------------------       ------------------------------------------------
NIS THOUSANDS                                         NIS MILLIONS
-----------------------------       ------------------------------------------------

Up to 10                                    98                0.6                  -
From 10          to 20                      42                0.6                  -
From 20          to 40                      34                1.0                  -
From 40          to 80                      30                1.4                0.2
From 80          to 150                     33                3.5                0.2
From 150         to 300                     56               11.2                1.5
From 300         to 600                     65               25.2                0.8
From 600         to 1,200                   81               68.3                2.3
From 1,200       to 2,000                   53               76.0                6.5
From 2,000       to 4,000                   53              141.8               10.9
From 4,000       to 8,000                   22              110.9                9.5
From 8,000       to 20,000                  17              175.2               38.0
From 20,000      to 40,000                   5              112.6               29.6
From 40,000      to 200,000                  3              171.5               84.7
Over 3,200,000                               1         (4)5,671.0                  -
                                    ----------         ----------         ----------

                                           593            6,570.8              184.2
                                    ==========         ==========         ==========

     (1)  The credit is net of the specific allowances for doubtful debts.

     (2)  Credit risk relating to off-balance sheet financial instruments as
          computed for the purpose of individual borrower debt limitations.

     (3)  The number of borrowers is based on the total credit and credit risk.
          Borrowers that constitute one legal entity were grouped together.

     (4)  Credit secured by a guarantee of the State.

                                     F - 28
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     D.   CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
          SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
          BORROWER (CONT'D)

                                                    DECEMBER 31, 2005
                                    ------------------------------------------------
                                    NUMBER OF                                CREDIT
                                   BORROWERS (3)        CREDIT (1)          RISK (2)
                                    ----------         ----------         ----------
AMOUNT OF CREDIT PER BORROWER                       REPORTED AMOUNTS
-----------------------------       ------------------------------------------------
NIS THOUSANDS                                         NIS MILLIONS
-----------------------------       ------------------------------------------------

Up to 10                                   114                1.0                  -
From 10          to 20                      87                1.2                  -
From 20          to 40                      43                1.2                  -
From 40          to 80                      63                3.4                0.2
From 80          to 150                     40                4.3                0.2
From 150         to 300                     61               12.4                1.4
From 300         to 600                     81               32.6                2.4
From 600         to 1,200                  102               87.1                5.3
From 1,200       to 2,000                   63               94.0                6.0
From 2,000       to 4,000                   63              161.9               13.6
From 4,000       to 8,000                   45              232.9               12.0
From 8,000       to 20,000                  25              283.1               43.4
From 20,000      to 40,000                   6              143.1               11.4
From 40,000      to 200,000                  5              275.1               99.3
Over 3,200,000                               1         (4)6,405.0                  -
                                    ----------         ----------         ----------

                                           799            7,738.3              195.2
                                    ==========         ==========         ==========

     (1)  The credit is net of the specific allowances for doubtful debts.

     (2)  Credit risk relating to off-balance sheet financial instruments as
          computed for the purpose of individual borrower debt limitations.

     (3)  The number of borrowers is based on the total credit and credit risk.
          Borrowers that constitute one legal entity were grouped together.

     (4)  Credit secured by a guarantee of the State.

     E.   CUSTOMER'S DEBT RECLASSIFIED TO THE "SECURITIES" ITEM

     In his letter of July 15, 2003, regarding a debt of a customer in respect
     of which a receiver was appointed to realize shares pledged in favor of the
     Bank, the Supervisor of Banks stated that it is no longer proper to treat
     the outstanding balance of the debt, due to be repaid through the
     realization of the said shares by the receiver, as a credit item.
     Accordingly, the balance of the debt was reclassified on June 30, 2003, and
     stated as shares included in the item "Available-for-sale securities",
     presented at their market value at that date.

     Beginning with June 30, 2003, these shares are included in the "Securities"
     item and from that date the changes in the market value of these shares are
     recorded in a capital reserve.

     In view of the inability of the customer to honor his debt, the Bank in the
     past classified this debt as non-income bearing and recorded the allowances
     required from such classification. The supplementary allowance for doubtful
     debts recorded in respect of the classification of the debt as non-income
     bearing was cancelled in 2005.

                                     F - 29
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 5 - CREDIT TO GOVERNMENTS

                                                          DECEMBER 31         DECEMBER 31
                                                              2006               2005
                                                           ----------         ----------
                                                           REPORTED           REPORTED
                                                            AMOUNTS            AMOUNTS
                                                           ----------         ----------
                                                          NIS MILLIONS       NIS MILLIONS
                                                           ----------         ----------

Deposits in foreign currency out of loans received                6.8               15.0
Amounts receivable in connection with exchange
 rate insurance of capital notes                                 24.9               26.9
Credit to foreign governments                                     2.0                6.9
Other credit                                                      7.8               10.2
                                                           ----------         ----------

Total credit to governments                                      41.5               59.0
                                                           ==========         ==========

NOTE 6 - FIXED ASSETS

     A.   This item includes equipment, computers, furniture and motor vehicles
          as follows:

                                     AT                 CHANGES DURING THE YEAR                 AT
                                  JANUARY 1          ------------------------------         DECEMBER 31
                                    2006              ADDITIONS          DISPOSALS             2006
                                 ----------          ----------          ----------         ----------
                                                           REPORTED AMOUNTS
                                 ---------------------------------------------------------------------
                                NIS MILLIONS        NIS MILLIONS        NIS MILLIONS       NIS MILLIONS
                                 ----------          ----------          ----------         ----------

Cost                                   57.3                 0.3                   -               57.6
Accumulated depreciation              (56.1)               (0.4)                  -              (56.5)
                                 ----------                                                 ----------

Net book value                          1.2                                                        1.1
                                 ==========                                                 ==========

     B.   The average rate of depreciation is 21% (2005 - 28%).

                                     F - 30
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 7 - OTHER ASSETS

                                                                       DECEMBER 31        DECEMBER 31
                                                                          2006               2005
                                                                       ----------         ----------
                                                                        REPORTED           REPORTED
                                                                         AMOUNTS            AMOUNTS
                                                                       ----------         ----------
                                                                      NIS MILLIONS       NIS MILLIONS
                                                                       ----------         ----------

Excess of income tax advances over current
 provisions                                                                   0.1                1.0
Prepaid expenses                                                              1.6                2.5
Payroll VAT receivable                                                        5.9                6.1
Debit balances in respect of derivative financial
  instruments                                                                 2.1                3.5
Sundry receivables and debit balances                                         2.4                2.5
                                                                       ----------         ----------

Total other assets                                                           12.1               15.6
                                                                       ==========         ==========

NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY

                                                                       DECEMBER 31        DECEMBER 31
                                                                          2006               2005
                                                                       ----------         ----------
                                                                        REPORTED           REPORTED
                                                                         AMOUNTS            AMOUNTS
                                                                       ----------         ----------
                                                                      NIS MILLIONS       NIS MILLIONS
                                                                       ----------         ----------

Deposit in respect of the "C", "CC" and "CC1" non-redeemable
 participating preference shares linked to the U.S. dollar (B)              315.4              316.4

Deposit in respect of the "D" redeemable non-participating
 preference shares linked to the U.S. dollar (C)                            116.3              116.6

Deposit in respect of the "DD" redeemable non-participating
 preference shares linked to the U.S. dollar (C)                            394.1              395.2
                                                                       ----------         ----------

Total perpetual deposits with the Treasury                                  825.8              828.2
                                                                       ==========         ==========

                                     F - 31
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY (CONT'D)

     A.   On May 6, 1996, an agreement was signed between the Bank and the
          Treasury of the State of Israel regarding changes in the method of
          computing the linkage on perpetual deposits, which the Bank had
          deposited with the Israeli Treasury with respect to the Bank's
          preference shares (C, CC, CC1, D, and DD).

          Until the signing of the agreement the aforementioned deposits were
          linked to the exchange rate of the dollar. In addition, the deposits
          bear dollar-linked interest at a rate, which, after the payment of VAT
          on profit imposed on the Bank's earnings (which is paid to the Bank by
          the Treasury of the state of Israel), leaves the Bank with an amount
          comprising net interest at a rate of 7.5% per annum, the same as the
          dividend the Bank used to pay on the aforementioned preference shares.
          Pursuant to an Order of the Income Tax Authorities, the interest and
          linkage differentials paid on the deposits are exempt from tax, except
          for VAT on profit on the interest. The deposits will be repaid to the
          Bank at the time of the redemption of the relevant shares or upon
          liquidation of the Bank.

          Pursuant to the deposit agreements, the aforementioned interest will
          be paid to the Bank on the payment dates of the dividends on the
          aforementioned preference shares. According to the agreement signed on
          May 6, 1996, the deposits have become, in effect, linked to the CPI,
          with retroactive effect from October 1, 1987. However, in no case
          shall their amount be less than their dollar value as computed prior
          to the date of the agreement. Namely, the linkage on the deposits as
          at October 1, 1987 is based on the CPI or the dollar, whichever is
          higher. The interest continues to be computed based on a dollar
          calculation.

          These deposit agreements do not explicitly state what will happen to
          the interest on the perpetual deposits in the period during which the
          Bank is prevented from distributing the aforementioned dividends on
          the aforementioned preference shares, and whether the interest will
          accrue and be paid when the Bank pays the accrued preferred dividends
          in arrears or upon liquidation. The Bank's Board of Directors reached
          the conclusion that the interest, which is not claimed due to the
          non-payment of the dividend, would accrue to the Bank's credit and,
          accordingly, upon liquidation, it would become part of the liquidation
          assets. The amount of the accrued interest, which has not yet been
          drawn as above, totals NIS 167.0 million as at December 31, 2006, and
          is not recorded in the financial statements. This amount is equal to
          the amount of the accrued dividend in arrears, which is also not
          recorded in the financial statements. See Note 16E for further details
          regarding the discontinued distribution of dividend and the requests
          made to the Ministry of Finance and the Government Companies Authority
          with respect to the above matter as well as regarding the legal
          proceedings being held on this matter.

          Concurrent with the signing of the above-mentioned agreement, the
          Bank's Articles of Association were amended in May 1996. According to
          the amendment, one ordinary "B" share was converted into an ordinary
          "B1" share (presently held by the State of Israel). The holder of the
          ordinary "B1" share is entitled to receive, upon liquidation of the
          Bank, the difference, if any, arising from the change in the method of
          computing the linkage of the said deposits, as discussed above.
          However, the right attached to the ordinary "B1" share ranks after the
          settlement in full of all amounts due in the present and future to
          creditors of the Bank, and after repayment of the paid-up share
          capital to the holders of the Bank's preferred ordinary shares,
          ordinary "A" shares and ordinary "B" shares and after repayment of the
          paid-up share capital, including linkage differentials, to the holders
          of the Bank's linked preferred shares of the "C", "CC", "CC1", "D" and
          "DD" classes, in accordance with the Bank's Articles of Association.

                                     F - 32
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)

          The above-mentioned agreement resulted in an increase in the amounts
          of the deposits with the Treasury as well as in the Bank's
          shareholders' equity. Such increase, as at the date of the signing of
          the agreement, amounted to NIS 279.6 million. As at December 31, 2006,
          this difference amounted to NIS 335.2 million (December 31, 2005 - NIS
          293.7 million).

     B.   As noted, up to May 6, 1996, these deposits were linked to the dollar.
          The difference which arose up to May 6, 1996, between the adjustment
          of the deposit on the basis of the dollar linkage, in respect of the
          participating, preference "C", "CC" and "CC1" shares, which are also
          dollar-linked, and the adjustment thereof to the CPI, was credited in
          the statement of shareholders' equity to "accumulated difference on
          translation of dollar linked deposits." Further to the initial
          implementation of Accounting Standard No. 22, as at January 1, 2006,
          the Bank cancelled the balance of the accumulated difference from the
          dollar-linked deposit, due to the reclassification of the
          participating preference shares as a liability under the item of
          "Participating preference shares" and they are being measured as from
          that date at their dollar-linked value.

     C.   Up to May 6, 1996, these deposits were linked to the dollar. The
          difference which arose up to May 6, 1996, between the adjustment of
          the deposit on the basis of the dollar linkage in respect of the
          non-participating preference "D" and "DD" shares, which do not
          constitute shareholders' equity and which are also linked to the
          dollar, and the adjustment of the above-mentioned deposit to the CPI,
          was recorded in the statement of income, as was recorded the
          difference arising from the liabilities in respect of these shares. As
          a result of signing the above-mentioned agreement, differences arose
          from the date of signing between the adjustment of the deposits with
          the Treasury (linked to the higher of the CPI or the dollar), and the
          adjustment of the non-participating dollar-linked preference D and DD
          shares and the participating dollar-linked preference C, CC, and CC1
          shares. Such differences are recorded in the statement of
          shareholders' equity under "accumulated difference on translation of
          CPI linked deposits." As at December 31, 2006, the balance of this
          item amounted to NIS 335.2 million (December 31, 2005 - NIS 293.7
          million).

NOTE 9 - DEPOSITS OF THE PUBLIC

                                                     DECEMBER 31  DECEMBER 31
                                                        2006         2005
                                                     ----------   ----------
                                                     REPORTED      REPORTED
                                                      AMOUNTS       AMOUNTS
                                                     ----------   ----------
                                                    NIS MILLIONS  NIS MILLIONS
                                                     ----------   ----------

On-demand deposits                                         14.2         27.0
Fixed-term and other deposits                              44.3        124.2
Savings deposits                                            8.4         27.0
                                                     ----------   ----------

Total deposits from the public                             66.9        178.2
                                                     ==========   ==========

                                     F - 33
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 10 - DEPOSITS OF BANKS

                                                    DECEMBER 31   DECEMBER 31
                                                       2006          2005
                                                     ----------   ----------
                                                     REPORTED      REPORTED
                                                      AMOUNTS       AMOUNTS
                                                     ----------   ----------
                                                    NIS MILLIONS  NIS MILLIONS
                                                     ----------   ----------

Fixed-term deposits                                         6.8         15.1
Special line of credit from the Bank of Israel (1)        761.5      1,033.7
                                                     ----------   ----------

Total deposits of banks                                   768.3      1,048.8
                                                     ==========   ==========

     (1)  See Note 17 regarding a pledge provided as security for credit
          received from the Bank of Israel.

NOTE 11 - PERPETUAL DEPOSIT

     This deposit of the Israeli Treasury is unlinked and is convertible at any
     time, at the request of the Israeli Treasury, into ordinary "B" shares of
     the Bank, at their par value.

     The deposit is perpetual, but the Israeli Treasury has the right to demand
     its redemption in the event that the State's voting power in the Bank falls
     below 20%. The redemption would thereupon be effected in twenty-five equal
     annual installments, beginning ten years after the date of the demand for
     redemption. The Bank has agreed to issue capital notes to the State of
     Israel in consideration of the deposit, on identical terms and conditions.

NOTE 12 - CAPITAL NOTES

     This series of capital notes of a par value of $ 49,976,000 bears interest
     at the rate of 7.5% per annum and was due on December 31, 1998. The terms
     of the above capital notes provide that the redemption date of notes for
     which the holders did not give notice of their intention to redeem, will be
     deferred by an additional 18 months each time. Over the last eight years,
     notes of a par value of $ 44,291,755 were redeemed. Accordingly, the
     balance of notes still outstanding as at December 31, 2006 amounts to $
     5,684,245 which constitute NIS 24.9 million (December 31, 2005 - $
     5,834,245 which constitute NIS 26.9 million). The next redemption date for
     the capital notes is December 31, 2007. The Bank is entitled to redeem the
     unredeemed capital notes at a premium of 5%. See Note 5 regarding amounts
     receivable with respect to exchange rate insurance on the capital notes.

                                     F - 34
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 13 - OTHER LIABILITIES

                                                                             DECEMBER 31        DECEMBER 31
                                                                                2006               2005
                                                                             ----------         ----------
                                                                              REPORTED           REPORTED
                                                                               AMOUNTS            AMOUNTS
                                                                             ----------         ----------
                                                                            NIS MILLIONS       NIS MILLIONS
                                                                             ----------         ----------

Excess of provision for severance pay and pensions over
 amounts funded (see Note 18)                                                      26.2               27.1

Provision for vacation pay, long-service
 bonus and unutilized sick leave (see Note 18)                                      5.4                5.4

Prepaid income                                                                      1.5                1.9

Credit balances in respect of derivative financial instruments                        -                0.5

Allowance for doubtful debts in respect of an off-balance sheet item                1.9                1.0

Sundry creditors and credit balances                                               23.2               20.5
                                                                             ----------         ----------

Total other liabilities                                                            58.2               56.4
                                                                             ==========         ==========

NOTE 14 - NON-PARTICIPATING SHARES

     A.   COMPOSITION:

                                                                             DECEMBER 31        DECEMBER 31
                                                                                2006               2005
                                                                             ----------         ----------
                                                                              REPORTED           REPORTED
                                                                               AMOUNTS            AMOUNTS
                                                                             ----------         ----------
                                                                            NIS MILLIONS       NIS MILLIONS
                                                                             ----------         ----------

"B" ordinary shares                                                                   -                  -
"D" preference shares linked to the US dollar (1)                                  69.1               75.3
"DD" preference shares linked to the US dollar (1)                                234.1              255.0
                                                                             ----------         ----------

Total non-participating shares                                                    303.2              330.3
                                                                             ==========         ==========

     (1)  For information regarding a deposit with the Israeli Treasury in
          respect of non-participating preference shares, see Note 8.

                                     F - 35
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 14 - NON-PARTICIPATING SHARES (CONT'D)

     B.   ADDITIONAL DATA REGARDING THE NON-PARTICIPATING SHARES AND THE
          PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)

                                                                            AUTHORIZED      ISSUED AND PAID
                                                                             ---------    ----------------------
                                                                               2006         2006         2005
         NUMBER                                                              ---------    ---------    ---------
         OF SHARES    CLASS OF SHARES                                          NIS          NIS           NIS
         ---------    ----------------------------------------               ---------    ---------    ---------

         135,399      "B" ordinary shares of NIS 0.1 each                     13,539.9     13,489.9     13,489.9

         164,000      7.5% cumulative "D" preference
                      shares of NIS 0.03 each, linked to the
                      US dollar at the rate of
                      $1 = NIS 0.0003, redeemable
                      at a premium of 5 5/8 %
                      (redemption dates will be
                      determined by the Bank subject
                      to approval by the Israeli Treasury)                       4,920        4,904        4,904

          60,000      7.5% cumulative  "DD" preference
                      shares of NIS 2.1 each, linked to the
                      US dollar at the rate of
                      $1 = NIS 0.0021 redeemable (without
                      premium) (redemption dates will be
                      determined by the Bank, subject to
                      approval by the Israeli Treasury)                        126,000      116,359      116,359
                                                                             ---------    ---------    ---------

                      Total shares                                           144,459.9    134,752.9    134,752.9
                                                                             =========    =========    =========

     C.   For rights in dividend distributions - see Note 16D.

     D.   For cessation of dividend distributions - see Note 16E.

     E.   For rights upon liquidation - see Note 16F.

     F.   None of the non-participating shares are traded on the Tel-Aviv Stock
          Exchange.

                                     F - 36
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 15 - PARTICIPATING PREFERENCE SHARES*

     A.   COMPOSITION:

                                                            DECEMBER 31
                                                               2006
                                                             -------
                                                             REPORTED
                                                             AMOUNTS
                                                             -------
                                                           NIS MILLIONS
                                                             -------

"C" preference shares linked to the US dollar (1)               71.8
"CC" preference shares linked to the US dollar (1)              42.3
"CC1" preference shares linked to the US dollar (1)             73.3
                                                             -------

Total participating shares                                     187.4
                                                             =======

     (1)  For information regarding a deposit with the Israeli Treasury in
          respect of participating preference shares, see Note 8.

     B.   ADDITIONAL DATA REGARDING THE PARTICIPATING PREFERENCE SHARES AND THE
          PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)

                                                                          AUTHORIZED          ISSUED AND PAID
                                                                            ------         ---------------------
                                                                             2006           2006           2005
         NUMBER                                                             ------         ------         ------
         OF SHARES      CLASS OF SHARES                                       NIS           NIS             NIS
         ---------      ----------------------------------------            ------         ------         ------

         17,000,000     6% cumulative "C" participating
                        preference shares of NIS 0.00018 each,
                        linked to the US dollar at the rate of
                        $1 = NIS 0.00018                                     3,060          3,060          3,060

          1,000,000     6% cumulative "CC" participating
                        preference shares of NIS 0.003 each,
                        linked to the US dollar at the rate of
                        $1 = NIS 0.0003                                      3,000          3,000          3,000

          1,740,000     6% cumulative "CC1" participating
                        preference shares of NIS 0.003 each,
                        linked to the US dollar at the rate of
                        $1 = NIS 0.0003                                      5,220          5,204          5,204
                                                                            ------         ------         ------

                        Total shares                                        11,280         11,264         11,264
                                                                            ======         ======         ======

     The participating preference shares are traded on the Tel Aviv Stock
     Exchange.

     *    For information pertaining to the accounting classification of the
          participating preference shares following the initial implementation
          of Accounting Standard No. 22, see Note 1D.

                                     F - 37
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 15 - PARTICIPATING PREFERENCE SHARES (CONT'D.)

     C.   For rights in dividend distributions - see Note 16D.

     D.   For cessation of dividend distributions - see Note 16E.

     E.   For rights upon liquidation - see Note 16F.

NOTE 16 - SHAREHOLDERS' EQUITY

     A.   The following are details regarding the nominal value of the share
          capital and the principal rights attached thereto:

                                                                      AUTHORIZED           ISSUED AND PAID
                                                                       -------         ----------------------
                                                                         2006            2006           2005
         NUMBER                                                        -------         -------        -------
         OF SHARES      CLASS OF SHARES                                  NIS             NIS             NIS
         ---------      ----------------------------------------       -------         -------        -------

           16,000       "A" ordinary shares of NIS 0.1
                        each                                             1,600           1,510          1,510

                1       "B1" ordinary share of
                        NIS 0.1                                            0.1             0.1            0.1

        1,000,000       8% cumulative participating
                        preferred ordinary shares of
                        NIS 0.001 each                                   1,000           1,000          1,000

           50,100       Unclassified shares of NIS 0.1
                        each                                             5,010               -              -
                                                                       -------         -------        -------
                        Total shares                                   7,610.1         2,510.1        2,510.1
                                                                       =======         =======        =======

     The ordinary preference shares are traded on the Tel Aviv Stock Exchange.
     None of the other shares are traded.

     B.   VOTING RIGHTS

     Only "A" class ordinary shares and ordinary preferred shares grant their
     holders the right to receive notification regarding general shareholders'
     meetings of the Bank, and to participate and vote in the general meetings
     of the Bank. Every "A" class ordinary share has 1000 votes and every
     ordinary preferred share has one vote.

                                     F - 38
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     C.   RIGHT TO APPOINT DIRECTORS

     According to the Bank's Articles of Association, the Board of Directors is
     comprised of no less than 7 and no more than 15 directors. The directors of
     the Bank (except for the Chairman of the Board) are appointed solely by
     holders of "A" class ordinary shares. Every 1015 "A" class ordinary shares
     grant the right to appoint one director. The other shares in the Bank do
     not grant rights to appoint directors of the Bank. The appointment of
     external directors is done in accordance with an agreement that was signed
     in July 2001 between Bank Leumi le-Israel B.M., Leumi Industrial
     Development Bank Ltd., Poalim Trust Services Ltd., Bank Hapoalim B.M.,
     Israel Discount Bank Ltd. and the nominee company of Israel Discount Bank
     Ltd., and the decision of the Government from March 2001. In accordance
     with the aforementioned agreement and Government decision, one external
     director is appointed by the general meeting on account of the rights to
     appoint directors of the three banking groups that are party to the
     aforementioned agreement (as proposed by one of them and supported by the
     others) and an additional external director is appointed by the general
     meeting on account of the State's rights to appoint directors.

     The Chairman of the Board, who is the extra director (the fifteenth
     director), is appointed by all the other members of the Board who were
     appointed, as above, by the holders of "A" class ordinary shares.

     D.   RIGHTS TO RECEIVE A PREFERENCE DIVIDEND

     According to the Bank's Articles of Association, in the event that there
     are sufficient profits, the Bank shall first distribute a preferred
     dividend of 6% per annum (plus necessary adjustments due to linkage to the
     dollar) on the paid-in capital of "C" class preference shares, the paid in
     capital of "CC" class preference shares and the paid-in capital of "CC1"
     class preference shares, and of 7 1/2% per annum (plus necessary
     adjustments due to linkage to the dollar) on the paid-in capital of "D"
     class preference shares, and the paid-in capital of "DD" class preference
     shares, all dividends being pari-passu and pro-rata to the paid-in capital
     of the aforementioned shares, and then will distribute an 8% cumulative
     preferred dividend on the paid in capital of ordinary preferred shares.

     E.   CESSATION OF DIVIDEND DISTRIBUTION

     The issued share capital of the Bank includes preference shares of classes
     C, CC, CC1, D, and DD to which the Bank used to pay quarterly 25% of the
     annual preferred dividend (the "quarterly dividend"). The Bank deposited
     the proceeds of issue of these preferred shares with the Israeli Treasury
     in perpetual deposits, which will be returned to the Bank only upon
     liquidation or for the purpose of redeeming the preference D and DD shares
     (hereinafter - the "perpetual deposits"). According to the deposit
     agreements, the interest on the perpetual deposits, at a rate of 7.5% (plus
     differentials of linkage to the dollar), is paid to the Bank on the payment
     dates of the dividends to the aforementioned preferred shares. The deposit
     agreements do not expressly stipulate how the interest on the perpetual
     deposits should be handled during periods in which the Bank is prevented
     from distributing dividends on these preferred shares, and whether the
     interest will accrue and be paid when the Bank pays the accrued preferred
     dividends in arrears or upon liquidation.

                                     F - 39
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION

     According to the Companies Law - 1999 (hereinafter - "the Companies Law"),
     a company is entitled to distribute dividends only from its profits (as
     defined therein), on condition that there is no reasonable fear that such
     distribution would prevent the company from meeting its existing
     liabilities and its expected liabilities when they come due (hereinafter -
     the "repayment ability test"). Nevertheless, the Court is permitted to
     approve the distribution of a dividend not from the company's profits, if
     it is convinced that the company meets the "repayment ability test".
     According to the Directives of Proper Banking Procedures, the Supervisor of
     Banks prohibited distribution of dividends by a banking institution if,
     among other things, one or more of the last three calendar years ended in a
     loss, or the aggregate results of the three quarters ending on the last day
     of the interim period for which the last financial statements were issued
     reflected a loss.

     The Bank ended the years 2001 through 2003 with a loss, the year 2004 with
     net earnings and the years 2005 - 2006 with a loss. Commencing with the
     financial statements for the first quarter of 2002, the Bank had no profits
     from which it could distribute a dividend under the Companies Law.

     In accordance with the Bank's Articles it can distribute a dividend only
     out of earnings of the Bank. As from the second quarter of 2002 the Bank
     does not even have any nominal earnings.

     The last quarterly dividend paid by the Bank in respect of the
     aforementioned preferred shares was the second quarterly dividend of 2002,
     and in order to distribute that dividend, the Bank obtained Court approval
     and the approval of the Supervisor of Banks.

     Immediately prior to the publication of the financial statements of the
     Bank for the third quarter of 2002, the Board of Directors of the Bank
     decided, at that stage, not to distribute a dividend for the third quarter
     of 2002. The decision was taken upon the advice of legal counsel and taking
     into consideration, among other things, the following issues:

     o    The results of operations of the third quarter of 2002 and the crisis
          which affected the Bank during that quarter.

     o    Non-existence of distributable profits under the Companies Law.

     o    The prohibition on distribution of dividends according to the Bank's
          Articles of Association when there are no profits, even in nominal
          terms.

     o    The prohibition on distribution of dividends according to Proper
          Banking Procedure, as long as the Supervisor of Banks has not replied
          to the Bank's request and has not permitted such distribution.

     o    The possibility that the interest on the Bank's perpetual deposits
          with the Israeli Treasury will continue to accrue to the credit of the
          Bank even if not actually paid, as long as no dividend is distributed.

     On December 1, 2002, the Bank received the reply of the Supervisor of Banks
     to its request for the position of the Supervisor on the matter of
     distributing a dividend in respect of the third quarter of 2002. The
     Supervisor's answer stipulated, among other things, that in the existing
     circumstances (as detailed in the letter), the Supervisor of the Banks
     believes that "it is inappropriate to distribute a dividend at this time".
     Nevertheless, the Supervisor of Banks noted that it was still not
     completely clear as to the legal aspects of various questions connected
     with the distribution of the dividend and the accrual of the interest on
     the perpetual deposits, and as to what the position of the State of Israel
     is on this issue. The Supervisor of Banks added that a copy of the letter
     had been sent to the Government Companies Authority and the Accountant
     General, and that following receipt of clarifications from them and from
     the Bank to the questions raised, the Supervisor will notify the Bank as to
     his position.

                                     F - 40
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)

     In view of the lack of clarity as to the matter of the accrual of interest
     on the perpetual deposits during the period in which the Bank is prevented
     from distributing a dividend (the lack of clarity to which the Supervisor
     of Banks referred to in his letter) and in view of the possible
     ramifications of this matter on the distribution of the dividends in
     respect of the preferred shares, the Board of Directors deliberated the
     matter, taking into consideration a comprehensive legal opinion presented
     to the Board. The Board reached the conclusion that the interest not paid
     to the Bank due to the non-distribution of the dividend should accrue to
     the Bank's credit and, accordingly, in the event of the Bank's liquidation,
     the interest will be paid to the receiver. In a letter dated January 22,
     2003, the Bank requested from the Ministry of Finance and the Government
     Companies Authority to issue their positions on this matter as soon as
     possible.

     In its reply dated March 13, 2003, the Ministry of Finance stated (among
     other things) that the monies paid on the perpetual deposits for purposes
     of distributing the dividend should be transferred to the Bank solely for
     purposes of redeeming the aforementioned redeemable preference shares
     (Classes D and DD), or upon liquidation. In order to clarify matters and to
     avoid doubt, the Bank once again petitioned the Ministry of Finance to
     confirm that it accepts the position of the Bank's Board of Directors as
     described above. Despite the reminders that were sent by the Bank on this
     matter, the requested clarification has still not been obtained. The Bank
     made further requests on this matter during 2004, but as yet has not
     received a satisfactory response. The Board of Directors has deliberated
     the matter of the dividend on the said preference shares several more
     times, and after taking into account all of the considerations and
     circumstances described above has decided to abide by its previous decision
     and to refrain from distributing any further dividend for the time being.

     From the date the Bank stopped paying the dividend on the aforementioned
     preferred shares, the State has stopped paying to the Bank the interest on
     its perpetual deposits.

     As at December 31, 2006, the accrued sum of the dividend, at the annual
     rate of 7.5%, in respect of the aforementioned preference shares (including
     a 1.5% participating dividend for C, CC and CC1 shares) that has not been
     paid since the Bank ceased paying the dividend amounts to NIS 167.0
     million. This amount was not recorded in the financial statements and it is
     equal to the amount of the accrued interest on the perpetual deposits,
     which was also not recorded in the financial statements.

     The total amount of NIS 167.0 million is comprised as follows: NIS 102.3
     million is in respect of non-participating shares (D and DD) and NIS 64.7
     million is in respect of participating shares (C, CC and CC1). Of this
     amount, an amount of NIS 36.8 million is in respect of 2006 and is
     comprised as follows: NIS 22.7 million in respect of non-participating D
     and DD shares and NIS 14.1 million in respect of participating C, CC and
     CC1 shares.

     On September 28, 2004 various financial entities that hold class C and/or
     CC and/or CC1 shares of the Bank filed with the Tel Aviv District Court an
     originating motion in which the Court is petitioned to instruct the Bank to
     pay to its shareholders a dividend at the rates and dates it was paid until
     the second quarter of 2002.

                                     F - 41
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)

     Since in the opinion of the Bank, the matter of the dividend distribution,
     which is the issue of the aforementioned originating motion, is connected
     to the question of whether under the circumstances of a non-distribution of
     dividend, the interest on the perpetual deposits of the Bank with the
     Israeli Treasury is accrued in its favor, and since the answers received so
     far from the Ministry of Finance were not clear enough and were
     insufficient, the Bank filed an originating motion with the Court on March
     9, 2005 against the Minister of Finance and the aforementioned financial
     entities, in which it requested a ruling declaring (among other things)
     that the interest on the perpetual deposits is indeed accrued in favor of
     the Bank. Following the request of the Bank and the aforementioned
     financial entities the Court ordered that the hearing on the two
     originating motions be consolidated. In the reply of the Minister of
     Finance to the originating motions prior to a preliminary hearing that was
     held on January 12, 2006, the Minister of Finance announced that his
     position is that the interest on the perpetual deposits does not accrue in
     favor of the Bank when it does not distribute a dividend, and that even so,
     in light of the Bank's circumstances, there is no justification for the
     distribution of a dividend by the Bank.

     For information pertaining to the originating motions on the aforementioned
     cessation of distribution of dividends, see Note 21D hereunder.

     F.   RIGHTS UPON LIQUIDATION

     Upon liquidation of the Bank, all available assets will be distributed to
     shareholders. Following are the first seven stages of distribution in
     accordance with the priorities appearing in the Bank's Articles of
     Association:

     o    First - to pay cumulative preferred dividends in arrears, including
          dollar linkage differentials, to all classes of preference shares (C,
          CC, CC1, D, DD) all being pari passu and pro-rata to the paid in
          capital of the aforementioned shares. As at December 31, 2006, the
          accrued amount of the preferred dividend in arrears is NIS 152.9
          million (as at December 31, 2005 - NIS 129.6 million).

     o    Second - to pay cumulative preferred dividends in arrears to preferred
          ordinary shares. As at December 31, 2006 the dividends in arrears in
          respect of the preferred ordinary shares amount to NIS 360 (as at
          December 31, 2005 - NIS 280).

     o    Third - to refund paid in capital (plus dollar linkage differentials)
          of "C" class preference shares, to refund paid in capital (plus dollar
          linkage differentials) of "CC" class preference shares, to refund paid
          in capital (plus dollar linkage differentials) of "CC1" class
          preference shares, to refund paid in capital (plus dollar linkage
          differentials) of "D" class preference shares, to refund paid in
          capital (plus dollar linkage differentials) of "DD" class preference
          shares - all being pari-passu and pro-rata to the paid in capital of
          the aforementioned shares. As at December 31, 2006, the aforementioned
          amounts to NIS 490.6 million (as at December 31, 2005 - NIS 534.4
          million).

     o    Fourth - to refund paid in capital of preferred ordinary shares. As at
          December 31, 2006, it amounts to NIS 1,000 (as at December 31, 2005 -
          NIS 1,000).

     o    Fifth - to refund paid in capital of class "A" ordinary shares, to
          refund paid in capital of class "B" ordinary shares, and to refund
          paid in capital of class "B1" ordinary shares - all being pari passu
          and pro-rata to the paid in capital of the aforementioned shares. As
          at December 31, 2006, the aforementioned amounts to NIS 14 thousand
          (as at December 31, 2005 - NIS 14 thousand).

                                     F - 42
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     F.   RIGHTS UPON LIQUIDATION (CONT'D)

     o    Sixth - the remainder (if at all) of the differences to be paid to the
          Bank by the State of Israel upon liquidation as a result of the rate
          of increase in the CPI as compared with the increase in the
          representative exchange rate of the dollar, in respect of the deposits
          made by the Bank with the State, shall be paid to the holder or
          holders of the class "B1" ordinary share. As at December 31, 2006, the
          aforementioned difference amounts to NIS 335.2 million (as at December
          31, 2005 - NIS 293.7 million).

     o    Seventh - the remainder of ordinary assets will be distributed between
          the holders of the class "A" ordinary shares, the holders of the
          preferred ordinary shares, and the holders of the C, CC and CC1
          preference shares, according to the paid in capital of these shares
          and at the ratio of ten per each agora of paid in class "A" ordinary
          shares, ten per each agora of paid in preferred ordinary shares, ten
          per each agora of paid in class "C" preference shares, six per each
          agora of paid in class "CC" preference shares and six per each agora
          of paid in class "CC1" preference shares - all being pari-passu and
          pro-rata to the paid in capital of the aforementioned shares.

NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
           BANKS

     Following is the calculation of capital adequacy in accordance with
     Directives Nos. 311 and 341 of the Supervisor of Banks, regarding "Minimal
     Capital Ratio" and "Capital Allocation with respect to Exposure to Market
     Risks":

     A.   CAPITAL FOR PURPOSES OF CALCULATING CAPITAL RATIO

                                DECEMBER 31   DECEMBER 31
                                   2006         2005
                                 -------       -------
                                 REPORTED     REPORTED
                                 AMOUNTS       AMOUNTS
                                 -------       -------
                               NIS MILLIONS  NIS MILLIONS
                                 -------       -------

First tier capital                  11.4         (13.1)
Second tier capital (1)             11.4             -
                                 -------       -------

Total capital                       22.8         (13.1)
                                 =======       =======

     (1)  The general allowance for doubtful debts, in the amount of NIS 38.9
          million was deducted from the credit since it is not a part of the
          second tier capital.

                                     F - 43
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
           BANKS (CONT'D)

     B.   WEIGHTED-BALANCES OF CREDIT RISK

                                                  DECEMBER 31, 2006                 DECEMBER 31, 2005
                                               ------------------------          ------------------------
                                                             WEIGHTED CREDIT                 WEIGHTED CREDIT
                                             BALANCES(2)     RISK BALANCES     BALANCES(2)     RISK BALANCES
                                               -------          -------          -------          -------
                                                                    REPORTED AMOUNTS
                                               ----------------------------------------------------------
                                            NIS MILLIONS     NIS MILLIONS     NIS MILLIONS     NIS MILLIONS
                                               -------          -------          -------          -------

ASSETS
Cash and deposits with banks                      66.4             11.7             72.9             12.0
Securities                                        50.4             50.4             63.2             63.2
Credit to the public (1)                       6,519.1            831.2          7,680.7          1,256.0
Credit to governments and
 perpetual deposits with the
 Israeli Treasury                                867.3                -            887.2                -
Buildings and equipment                            1.1              1.1              1.2              1.2
Other assets                                      12.1              2.4             15.6              3.6
                                               -------          -------          -------          -------

Total assets                                   7,516.4            896.8          8,720.8          1,336.0
                                               =======          =======          =======          =======

OFF-BALANCE SHEET FINANCIAL
 INSTRUMENTS
Transactions representing credit risk            224.0            182.8            241.6            188.2
Derivative financial instruments                  99.3              1.9            197.0              3.7
                                               -------          -------          -------          -------

Total off-balance sheet financial
 instruments                                     323.3            184.7            438.6            191.9
                                               -------          -------          -------          -------

Total credit risk assets                       7,839.7          1,081.5          9,159.4          1,527.9
Market risk                                          -            615.5                -            238.0
                                               -------          -------          -------          -------

Total risk assets                              7,839.7          1,697.0          9,159.4          1,765.9
                                               =======          =======          =======          =======

     (1)  The general allowance for doubtful debts, in the amount of NIS 38.9
          million was deducted from the credit since it is not a part of the
          second tier capital.

     (2)  Assets - balance sheet amounts, off-balance sheet financial
          instruments - nominal balances weighted by credit conversion factors.

                                     F - 44
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
           BANKS (CONT'D)

     C.   RATIO OF CAPITAL TO TOTAL RISK ASSETS

                                                                         DECEMBER 31    DECEMBER 31
                                                                            2006           2005
                                                                           -------       -------
                                                                              %              %
                                                                           -------       -------

Ratio of first tier capital to total risk assets                              0.67         (0.74)
Ratio of second tier capital to total risk assets                             0.67             -
                                                                           -------       -------

Ratio of total first and second tier capital to total risk assets             1.34         (0.74)
                                                                           =======       =======

     The Bank's ratio of capital to risk assets is lower than the 9% prescribed
     by Proper Banking Procedures.

NOTE 17 - LIENS AND RESTRICTIVE CONDITIONS

     A.   In connection with receiving of the special line of credit from the
          Bank of Israel, the Bank signed on November 14, 2002 a debenture in
          favor of the Bank of Israel, that was amended on December 29, 2005,
          whereby the Bank registered a first degree floating pledge on all of
          its assets, excluding the following assets:

          -    Loans and credits under State guarantee at a total balance sheet
               value (according to financial statements as at December 31, 2006)
               of NIS 5.7 billion.

          -    The Bank's deposit with the Ministry of Finance (the Accountant
               General) in respect of the DD preference shares of the Bank.

          -    Deposits made by the Bank from time to time with other banking
               institutions in Israel and/or abroad, and/or with brokers in
               Israel and/or abroad, which were deposited in connection with
               guaranteeing the Bank's liabilities to such banking institutions
               and/or brokers, which were created subsequent to November 14,
               2002.

          Under this debenture, the Bank undertook, among other things, not to
          register additional pledges on the assets pledged as part of the
          debenture and not to dispose of such assets, in any form, without
          receiving the prior written consent of the Bank of Israel.
          Notwithstanding the above, the debenture stipulates that the floating
          pledge registered therein does not prevent the Bank, or restrict the
          Bank in the ordinary course of its business, including the fulfillment
          of its obligations, receiving repayments of credit or granting credit.

          The balance of the credit line (including accrued interest) as at
          December 31, 2006, amounted to NIS 761.5 million (December 31, 2005 -
          NIS 1,033.7 million).

                                     F - 45
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 17 - LIENS AND RESTRICTIVE CONDITIONS (CONT'D)

     B.   Deposits with banks in the amount of NIS 22.0 million have been
          pledged by the Bank in favor of those banks. The Bank of Israel gave
          its consent to the pledge, which serves as collateral for transactions
          in derivative financial instruments with those banks.

NOTE 18 - EMPLOYEE RIGHTS

     A.   SEVERANCE PAY

     1.   The Bank's liability for the payment of severance pay to its
          employees, which is calculated as customary on the basis of one
          monthly salary per each year of employment, is fully covered by
          payments and deposits with recognized pension and provident funds, the
          purchase of insurance policies and by the unfunded provision in the
          books.

     2.   Commencing on July 15, 2002, Mr. U. Galili has served as the General
          Manager of the Bank. During 2005, the Bank extended the employment
          agreement of Mr. Galili until July 31, 2008 (the end of the Run-Off
          plan).

          Commencing on August 14, 2002, Dr. Ra'anan Cohen has served as the
          Chairman of the Board of Directors of the Bank. During 2005, the
          employment agreement of Dr. Ra'anan Cohen was extended until July 31,
          2008 (the end of the Run-Off plan).

          On September 1, 2002, Mr. A. Savir joined the Bank's Management. Mr.
          Savir serves as Deputy General Manager and as Credit Supervisor of the
          Bank. During 2005, the employment agreement of Mr. Savir was extended
          until July 31, 2008 (the end of the Run-Off plan).

          After the balance sheet date, on May 30, 2007 the Audit Committee and
          the Board of Directors of the Bank approved that the Chairman of the
          Board of the Bank, the General Manager of the Bank and the Deputy
          General Manager, shall be entitled at the conclusion of their service
          to additional severance payments (in addition to the funds allocated
          for their benefit to manager's insurance policies and/or pension
          funds) in the amount of one month's salary for each year of service
          and the relative share of a month's salary in respect of part of the
          year.

          This resolution is subject to the approval of the Supervisor of Wages
          and Labor Agreements in the Ministry of Finance, who announced that he
          has no objection to the wording of the resolution and that his
          approval of the resolution will be considered if, and only if there is
          an event of conclusion of employment at the end of the Bank's Run-off
          plan (which is supposed to end on July 31, 2008) or if the ownership
          of the Bank is transferred to an outside investor prior to the end of
          the Run-off plan. The approval of the additional severance payments to
          the Chairman of the Board also requires the approval of the Bank's
          General Meeting which has yet to be given.

          The periods of service of the Chairman of the Board of the Bank, the
          General Manager of the Bank and the Deputy General Manager, started at
          different dates during the second half of 2002, therefore, and
          assuming that their periods of service will conclude at the end of the
          Run-off plan, on July 31, 2008, then we are dealing with additional
          severance payments of six months' salary for each of the above. The
          cost of the additional severance payments for the three of them
          together for the above mentioned period amounts to NIS 0.9 million.

                                     F - 46
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 18 - EMPLOYEE RIGHTS (CONT'D)

     A.   SEVERANCE PAY

     3.   On December 26, 2002 a collective agreement was signed between the
          Bank, the New Histadrut (the general federation of labor) and the
          representatives of the Bank's employees, which applies to the Bank's
          employees who are subject to the collective agreements of the Bank.
          The agreement was for a period of 3 years and can be extended by one
          additional year. The agreement arranged, inter alia, the following
          matters:

          >>   Management's right to dismiss employees in the framework of
               cutbacks in the Bank's activities, as well as the process of
               dismissal.

          >>   Cutbacks that will be made in the salary of the employees and in
               their related benefits.

          >>   Benefits and special payments that will be due to the employees
               who are dismissed, including additional severance pay in addition
               to those provided in the law, and with respect to employees
               having worked a certain number of years and with a certain number
               of years remaining until retirement, conversion of the right to
               enhanced severance pay, with the right to receive an early
               pension.

          On March 14, 2005 the parties signed a new collective agreement which
          extended the period of the aforementioned collective agreement (from
          December 26, 2002) until the earlier of the end of the Bank's Run-Off
          plan (including any change and extension made and approved by the
          Government) or December 31, 2007 (the "First Extension Agreement").

          The First Extension Agreement also provided and clarified the
          following points:

          A.   Employees who according to the original agreement are entitled to
               an early pension following their dismissal, will be entitled to
               receive it until they reach the age they are entitled to receive
               an ordinary pension from the pension fund to which they belong,
               following the pension reform that came into effect in Israel
               after the signing of the original agreement.

          B.   Some of the concessions the employees agreed to make in the
               original agreement that were limited in time, will continue to
               apply also in the period of the first extension agreement.

          On July 12, 2006, a new collective agreement was signed between the
          parties (the "second extension agreement") which extended for the
          second time the aforementioned collective agreement (dated December
          26, 2002), as amended by the first extension agreement, until July 31,
          2008 (the end of the Run-off Plan). The second extension agreement
          also stipulated that should the Run-off Plan be extended past July 31,
          2008, the aforementioned collective agreement would be extended until
          the termination of the Run-off Plan, but not beyond December 31, 2008.

          Certain provisions of the aforementioned agreements, which for the
          most part grant the employees special benefits and payments following
          their dismissal, were also applied to employees with personal
          contracts who began working with the Bank before January 1, 2003, in
          exchange for their agreeing to certain reductions in their terms of
          employment, as was done with respect to the employees under the
          collective agreements.

                                     F - 47
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 18 - EMPLOYEE RIGHTS (CONT'D.)

     A.   SEVERANCE PAY (CONT'D.)

          As at December 31, 2006, the balance of the provision for severance
          pay expected to be paid to the employees amounted to NIS 20.8 million
          (excluding payroll VAT), compared with NIS 21.0 million in December
          2005.

     4.   In the past, the Bank signed personal employment contracts with three
          senior executives of the Bank. The Bank and these executives have the
          right to terminate the employee-employer relationship by providing an
          advance notice of three months.

          In accordance with these contracts, in the event of the resignation of
          the executives, the Bank has undertaken to pay them additional
          severance payments and an "adaptation bonus" in addition to the
          regular severance pay. In the event that their employment is
          terminated by the Bank, these executives were entitled pursuant to the
          said contracts to severance pay at higher rates or to early pensions.
          In August 2006, the employment contracts of these three employees were
          amended with regard to the severance terms in the event of the
          termination of their employment by the Bank. The amended terms, which
          in general are inferior to those included in the original employee
          contracts, were determined on the basis of the principles of the
          collective agreement dated December 26, 2002 and in accordance with
          the approval of the Supervisor of Wages in the Israeli Finance
          Ministry.

          The Bank has an appropriate provision included in the reserve for
          severance pay in respect of these liabilities, which as at December
          31, 2006 amounted to NIS 6.5 million.

     5.   In the framework of the Economic Policy Law for 2005 (Legislation
          Amendments) - 2004, which was approved by the Knesset on March 29,
          2005, the definition of "salary" for purposes of paying payroll VAT by
          financial institutions, including the Bank, was expanded so as to
          include also a retirement grant or a death grant and any other amount
          paid by an employer to an advanced study fund or provident fund that
          is not a central severance pay fund, even if according to Section 3 of
          the Income Tax Ordinance it is not considered earned income on the
          date it was paid to the advanced study fund or the provident fund. The
          amendment is in effect from January 1, 2005. In accordance with an
          examination of the Bank, the aforementioned law mainly affects the
          special collective agreement that was signed on December 26, 2002 with
          respect to the dismissal of employees. Following the said change in
          the definition of payroll VAT the Bank recorded a provision in 2005 in
          the amount of NIS 3.7 million in respect of payroll VAT on expenses
          relating to early retirement.

     6.   Following is the data relating to provisions and funding for severance
          pay included in the balance sheet:

                                                           DECEMBER 31  DECEMBER 31
                                                              2006         2005
                                                            -------       -------
                                                            REPORTED     REPORTED
                                                            AMOUNTS       AMOUNTS
                                                            -------       -------
                                                          NIS MILLIONS  NIS MILLIONS
                                                            -------       -------

Provision for severance pay                                    48.0       (*)48.6
Amounts funded with pension and provident funds
 (including earnings thereon)                                  21.8       (*)21.5
                                                            -------       -------
Unfunded provision included in "Other liabilities"             26.2          27.1
                                                            =======       =======

          The Bank may not withdraw amounts funded other than for the purpose of
          discharging severance pay liabilities.

          (*)  Reclassified

                                     F - 48
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 18 - EMPLOYEE RIGHTS (CONT'D.)

     B.   UNUTILIZED SICK LEAVE

     Employees who are subject to collective employment agreements with the Bank
     and who retire or are terminated are entitled, under certain conditions, to
     compensation in respect of unutilized sick leave. In the opinion of
     Management of the Bank an adequate provision has been included in the
     financial statements in this respect. The balance of the provision as at
     balance sheet date totals NIS 3.1 million (December 31, 2005 - NIS 3.1
     million) and is included in the "Other liabilities" item.

     C.   LONG SERVICE BONUS

     In accordance with the current collective employment agreement at the Bank,
     employees who are subject to this agreement are entitled to a special long
     service bonus upon completing periods of twenty-five years and thirty years
     of service with the Bank. A full provision has been made in the financial
     statements for this liability, based on the probability of the employee
     still being employed by the Bank on the effective dates. The balance of the
     provision as at balance sheet date is NIS 0.1 million (December 31, 2005 -
     NIS 0.1 million). This balance is included in "Other liabilities" item.

     D.   UNUTILIZED VACATION

     The balance of the provision for unutilized vacation is NIS 2.2 million as
     at balance sheet date (December 31, 2005 - NIS 2.2 million). The balance is
     included in "Other liabilities" item.

                                     F - 49
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS

REPORTED AMOUNTS

                                                                        DECEMBER 31, 2006
                                   ----------------------------------------------------------------------------------------
                                                                    FOREIGN CURRENCY OR LINKED
                                       ISRAELI CURRENCY                       THERETO
                                   -----------------------           -------------------------
                                                  LINKED TO            US               OTHER       NON-MONETARY
                                  UNLINKED         THE CPI           DOLLAR           CURRENCIES       ITEMS         TOTAL
                                   -------         -------           -------           -------        -------       -------
                                 NIS MILLIONS   NIS MILLIONS      NIS MILLIONS      NIS MILLIONS   NIS MILLIONS   NIS MILLIONS
                                   -------         -------           -------           -------        -------       -------

ASSETS
Cash and deposits
 with banks                           33.1            10.2              22.9               0.2              -          66.4
Securities                               -             0.7                 -                 -           49.7          50.4
Credit to the public                 213.9           464.8           5,819.5              20.9              -       6,519.1
Credit to governments                    -             7.8              26.9               6.8              -          41.5
Fixed assets                             -               -                 -                 -            1.1           1.1
Other assets                          10.5               -                 -                 -            1.6          12.1
Perpetual deposits with
 the Israeli Treasury                    -           825.8                 -                 -              -         825.8
                                   -------         -------           -------           -------        -------       -------

Total assets                         257.5         1,309.3           5,869.3              27.9           52.4       7,516.4
                                   -------         -------           -------           -------        -------       -------

LIABILITIES
Deposits of the public                30.6            32.7               3.5               0.1              -          66.9
Deposits of banks                    761.5               -                 -               6.8              -         768.3
Deposits of
 the Government                          -           306.1           5,781.3                 -              -       6,087.4
Perpetual deposit                      0.1               -                 -                 -              -           0.1
Capital notes                            -               -              24.9                 -              -          24.9
Other liabilities                     17.5            37.6               1.6                 -            1.5          58.2
Non-participating shares                 -               -             303.2                 -              -         303.2
Participating shares                     -               -             187.4                 -              -         187.4
                                   -------         -------           -------           -------        -------       -------

Total liabilities                    809.7           376.4           6,301.9               6.9            1.5       7,496.4
                                   -------         -------           -------           -------        -------       -------

Difference                          (552.2)          932.9            (432.6)             21.0           50.9          20.0

Forward transactions, net             96.2           (44.0)            (29.5)            (22.7)             -             -
                                   -------         -------           -------           -------        -------       -------

Total                               (456.0)          888.9            (462.1)             (1.7)          50.9          20.0
                                   =======         =======           =======           =======        =======       =======

                                     F - 50
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT'D)

REPORTED AMOUNTS

                                                                             DECEMBER 31, 2005
                                      ------------------------------------------------------------------------------------------
                                                                          FOREIGN CURRENCY OR LINKED
                                           ISRAELI CURRENCY                        THERETO
                                      -------------------------           -------------------------
                                                       LINKED TO            US               OTHER       NON-MONETARY
                                     UNLINKED           THE CPI           DOLLAR           CURRENCIES       ITEMS         TOTAL
                                      -------           -------           -------           -------        -------       -------
                                   NIS MILLIONS      NIS MILLIONS      NIS MILLIONS      NIS MILLIONS   NIS MILLIONS  NIS MILLIONS
                                      -------           -------           -------           -------        -------       -------

ASSETS
Cash and deposits
 with banks                              37.5              16.7              17.9               0.8              -          72.9
Securities                                  -               2.6                 -                 -           60.6          63.2
Credit to the public                    400.2             616.3           6,597.1              67.1              -       7,680.7
Credit to governments                       -              10.2              33.7              15.1              -          59.0
Fixed assets                                -                 -                 -                 -            1.2           1.2
Other assets                             13.1                 -                 -                 -            2.5          15.6
Perpetual deposits with
 the Israeli Treasury                       -             828.2                 -                 -              -         828.2
                                      -------           -------           -------           -------        -------       -------

Total assets                            450.8           1,474.0           6,648.7              83.0           64.3       8,720.8
                                      -------           -------           -------           -------        -------       -------

LIABILITIES
Deposits of the public                   87.8              78.6              11.5               0.3              -         178.2
Deposits of banks                     1,033.7                 -                 -              15.1              -       1,048.8
Deposits of
 the Government                             -             356.4           6,526.6                 -              -       6,883.0
Perpetual deposit                         0.1                 -                 -                 -              -           0.1
Capital notes                               -                 -              26.9                 -              -          26.9
Other liabilities                        15.1              37.7               1.8                 -            1.8          56.4
Non-participating shares                    -                 -             330.3                 -              -         330.3
                                      -------           -------           -------           -------        -------       -------

Total liabilities                     1,136.7             472.7           6,897.1              15.4            1.8       8,523.7
                                      -------           -------           -------           -------        -------       -------

Difference                             (685.9)          1,001.3            (248.4)             67.6           62.5         527.4

Forward transactions, net               177.9             (44.9)            (59.7)            (73.3)             -             -
Out-of-the-money options,
 net (in terms of underlying
 asset)                                   2.9                 -              (2.9)                -              -             -
                                      -------           -------           -------           -------        -------       -------

Total                                  (505.1)            956.4            (311.0)             (5.7)          62.5         197.1
                                      =======           =======           =======           =======        =======       =======
Out-of-the-money options,
 net (discounted par value)              14.5                 -             (14.5)                -              -             -
                                      =======           =======           =======           =======        =======       =======

                                     F - 51
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
          MATURITY DATE (1)

REPORTED AMOUNTS
                                                                                                                      DECEMBER 31, 2006
                                          -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                         ON DEMAND     FROM ONE    FROM THREE     FROM ONE       FROM TWO    FROM THREE    FROM FOUR   FROM FIVE    FROM TEN        OVER         TOTAL       WITHOUT         TOTAL
                                         AND UP TO     TO THREE     MONTHS TO      TO TWO        TO THREE      TO FOUR      TO FIVE     TO TEN      TO TWENTY      TWENTY        CASH        MATURITY    BALANCE SHEET
                                         ONE MONTH      MONTHS      ONE YEAR        YEARS         YEARS        YEARS        YEARS        YEARS        YEARS         YEARS        FLOWS        DATE(2)       AMOUNT (3)
                                          -------      -------       -------       -------       -------      -------      -------      -------      -------       -------      -------      ---------      -------
                                       NIS MILLIONS NIS MILLIONS  NIS MILLIONS  NIS MILLIONS NIS MILLIONS  NIS MILLIONS NIS MILLIONS NIS MILLIONS  NIS MILLIONS NIS MILLIONS NIS MILLIONS  NIS MILLIONS   NIS MILLIONS
                                          -------      -------       -------       -------       -------      -------      -------      -------      -------       -------      -------      ---------      -------

UNLINKED ISRAELI CURRENCY
Assets                                       37.1          3.6          36.6          34.3          30.3          4.0          2.1          3.3            -             -        151.3          128.0        257.5
Liabilities                                  25.2         21.1         128.5         114.0             -            -            -            -            -             -        288.8      (4) 569.5        809.7
                                          -------      -------       -------       -------       -------      -------      -------      -------      -------       -------     --------      ---------      -------
Difference                                   11.9        (17.5)        (91.9)        (79.7)         30.3          4.0          2.1          3.3            -             -       (137.5)        (441.5)      (552.2)
Derivative instruments
 excluding options                           52.2         19.9          24.1             -             -            -            -            -            -             -         96.2              -         96.2
ISRAELI CURRENCY LINKED TO THE CPI
Assets                                       10.2         21.4          74.7          82.5          73.9         67.5         58.7        163.4         87.9           0.8        641.0          825.8      1,309.3
Liabilities                                  20.5         11.9          47.5          51.9          49.3         48.2         47.0         89.7          3.2             -        369.2           37.6        376.4
                                          -------      -------       -------       -------       -------      -------      -------      -------      -------       -------     --------      ---------      -------
Difference                                  (10.3)         9.5          27.2          30.6          24.6         19.3         11.7         73.7         84.7           0.8        271.8          788.2        932.9
Derivative instruments
 excluding options                              -        (19.9)        (24.1)            -             -            -            -            -            -             -        (44.0)             -        (44.0)
FOREIGN CURRENCY AND
 LINKED THERETO
Assets                                       26.2        160.4         496.8         617.5         611.7        606.4        600.6      2,949.2      3,672.5             -      9,741.3           36.8      5,897.2
Liabilities                                   2.8        158.1         488.8         608.3         604.1        599.9        595.6      2,940.5      3,673.6             -      9,671.7          492.2      6,308.8
                                          -------      -------       -------       -------       -------      -------      -------      -------      -------       -------     --------      ---------      -------
Difference                                   23.4          2.3           8.0           9.2           7.6          6.5          5.0          8.7         (1.1)            -         69.6         (455.4)      (411.6)
Derivative instruments
 excluding options                          (52.2)           -             -             -             -            -            -            -            -             -        (52.2)             -        (52.2)
NON-MONETARY ITEMS
Assets                                          -            -             -             -             -            -            -            -            -             -            -           52.4         52.4
Liabilities                                     -            -             -             -             -            -            -            -            -             -            -            1.5          1.5
                                          -------      -------       -------       -------       -------      -------      -------      -------      -------       -------     --------      ---------      -------
Difference                                      -            -             -             -             -            -            -            -            -             -            -           50.9         50.9

TOTAL AS AT DECEMBER 31, 2006
ASSETS                                       73.5        185.4         608.1         734.3         715.9        677.9        661.4      3,115.9      3,760.4           0.8     10,533.6        1,043.0      7,516.4
LIABILITIES                                  48.5        191.1         664.8         774.2         653.4        648.1        642.6      3,030.2      3,676.8             -     10,329.7        1,100.8      7,496.4
                                          -------      -------       -------       -------       -------      -------      -------      -------      -------       -------     --------      ---------      -------
DIFFERENCE                                   25.0         (5.7)        (56.7)        (39.9)         62.5         29.8         18.8         85.7         83.6           0.8        203.9          (57.8)        20.0
                                          =======      =======       =======       =======       =======      =======      =======      =======      =======       =======     ========      =========      =======

(1)  In this Note the future cash flows in respect of assets and liabilities are
     presented according to linkage basis, in accordance with the remaining
     period to the contractual maturity date of each cash flow.

(2)  Including assets past due in the amount of NIS 154.3 million. The data is
     net of specific allowances for doubtful debts.

(3)  As included in Note 19 "Assets and liabilities classified according to
     linkage basis", including off-balance sheet amounts for derivatives.

(4)  The balance includes the balance of the credit line that was provided by
     the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).

                                     F - 52
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
          MATURITY DATE (1) (CONT'D)

REPORTED AMOUNTS

                                                                                                                           DECEMBER 31, 2005
                                              -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                            ON DEMAND      FROM ONE     FROM THREE     FROM ONE        FROM TWO    FROM THREE    FROM FOUR    FROM FIVE      FROM TEN          OVER        TOTAL           WITHOUT         TOTAL
                                            AND UP TO      TO THREE      MONTHS TO      TO TWO         TO THREE      TO FOUR      TO FIVE       TO TEN       TO TWENTY        TWENTY       CASH            MATURITY    BALANCE SHEET
                                            ONE MONTH       MONTHS       ONE YEAR        YEARS           YEARS         YEARS        YEARS        YEARS         YEARS           YEARS        FLOWS           DATE(2)       AMOUNT (3)
                                              -------       -------       -------       -------         -------       -------      -------      -------        -------        -------      -------          -------         -------
                                           NIS MILLIONS   NIS MILLIONS  NIS MILLIONS NIS MILLIONS   NIS MILLIONS   NIS MILLIONS NIS MILLIONS  NIS MILLIONS NIS MILLIONS    NIS MILLIONS NIS MILLIONS      NIS MILLIONS   NIS MILLIONS
                                              -------       -------       -------       -------         -------       -------      -------      -------        -------        -------      -------          -------         -------

UNLINKED ISRAELI CURRENCY
Assets                                           61.3          18.2          46.5          24.6            32.2          10.8          7.1          5.8              -              -        206.5            285.9           450.8
Liabilities                                      70.0          37.3         135.2         311.9           114.0             -            -            -              -              -        668.4         (4)562.5         1,136.7
                                              -------       -------       -------       -------         -------       -------      -------      -------        -------        -------     --------         --------         -------
Difference                                       (8.7)        (19.1)        (88.7)       (287.3)          (81.8)         10.8          7.1          5.8              -              -       (461.9)          (276.6)         (685.9)
Derivative instruments
 excluding options                              151.5          10.2          19.6             -               -             -            -            -              -              -        181.3                -           181.3
Options (in terms of underlying asset)            2.9             -             -             -               -             -            -            -              -              -          2.9                -             2.9
ISRAELI CURRENCY LINKED TO THE CPI
Assets                                           22.9          21.1         104.5         122.2            96.7          86.2         77.1        220.7           83.7              -        835.1            828.2         1,474.0
Liabilities                                      15.4          21.6          94.7          54.7            52.2          49.5         48.4        136.0            3.6              -        476.1             36.7           472.7
                                              -------       -------       -------       -------         -------       -------      -------      -------        -------        -------     --------         --------         -------
Difference                                        7.5          (0.5)          9.8          67.5            44.5          36.7         28.7         84.7           80.1              -        359.0            791.5         1,001.3
Derivative instruments
 excluding options                              (15.4)        (10.3)        (19.7)            -               -             -            -            -              -              -        (45.4)               -           (45.4)
FOREIGN CURRENCY AND
 LINKED THERETO
Assets                                           25.4         184.4         609.9         691.2           673.3         666.7        659.1      3,225.7        4,649.5              -     11,385.2             23.7         6,731.7
Liabilities                                      10.2         174.5         534.7         674.9           662.7         658.1        653.5      3,208.3        4,646.4              -     11,223.3            332.1         6,912.5
                                              -------       -------       -------       -------         -------       -------      -------      -------        -------        -------     --------         --------         -------
Difference                                       15.2           9.9          75.2          16.3            10.6           8.6          5.6         17.4            3.1              -        161.9           (308.4)         (180.8)
Derivative instruments
 excluding options                             (133.0)            -             -             -               -             -            -            -              -              -       (133.0)               -          (133.0)
Options                                          (2.9)            -             -             -               -             -            -            -              -              -         (2.9)               -            (2.9)
NON-MONETARY ITEMS
Assets                                            0.4           0.8           1.3             -               -             -            -            -              -              -          2.5             62.2            64.3
Liabilities                                       0.3           0.5           0.8           0.2               -             -            -            -              -              -          1.8                -             1.8
                                              -------       -------       -------       -------         -------       -------      -------      -------        -------        -------     --------         --------         -------
Difference                                        0.1           0.3           0.5          (0.2)              -             -            -            -              -              -          0.7             62.2            62.5

TOTAL AS AT DECEMBER 31, 2005
ASSETS                                          110.0         224.5         762.2         838.0           802.2         763.7        743.3      3,452.2        4,733.2              -     12,429.3          1,200.0         8,720.8
LIABILITIES                                      95.9         233.9         765.4       1,041.7           828.9         707.6        701.9      3,344.3        4,650.0              -     12,369.6            931.3         8,523.7
                                              -------       -------       -------       -------         -------       -------      -------      -------        -------        -------     --------         --------         -------
DIFFERENCE                                       14.1          (9.4)         (3.2)       (203.7)          (26.7)         56.1         41.4        107.9           83.2              -         59.7            268.7           197.1
                                              =======       =======       =======       =======         =======       =======      =======      =======        =======        =======     ========         ========         =======
DERIVATIVE INSTRUMENTS
 EXCLUDING OPTIONS                                3.1          (0.1)         (0.1)            -               -             -            -            -              -              -          2.9                -               -
OPTIONS (IN TERMS OF UNDERLYING ASSET)              -             -             -             -               -             -            -            -              -              -            -                -               -

(1)  In this Note the future cash flows in respect of assets and liabilities are
     presented according to linkage basis, in accordance with the remaining
     period to the contractual maturity date of each cash flow.

(2)  Including assets past due in the amount of NIS 293.4 million. The data is
     net of specific allowances for doubtful debts.

(3)  As included in Note 19 "Assets and liabilities classified according to
     linkage basis", including off-balance sheet amounts for derivatives.

(4)  The balance includes the balance of the credit line that was provided by
     the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).

                                     F - 53
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS

     A.   OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

                                            DECEMBER 31      DECEMBER 31
                                               2006            2005
                                            ------------   ------------
                                              REPORTED      REPORTED
                                              AMOUNTS        AMOUNTS
                                            ------------   ------------
                                            NIS MILLIONS   NIS MILLIONS
                                            ------------   ------------

Transactions the balance of which
 represents a credit risk -

Guarantees securing credit                      170.9        171.6
Guarantees to home purchasers                    46.2         49.8
Other guarantees and liabilities                  6.3         17.4
Unutilized revolving credit facilities            0.6          1.7

     B.   OTHER CONTINGENT LIABILITIES AND COMMITMENTS

     1.   See Note 18A with respect to the contingent liabilities regarding
          personal employment agreements with senior executives.

     2.   Long-term rental agreement -

          During 2003, the Bank signed a rental agreement in respect of its
          office premises for the period ending in August 2009. The annual
          rental payment, which is linked to the CPI, amounts to NIS 1.0
          million.

     3.   As at January 1, 2004 the Bank has outsourced its computer services,
          according to which it signed an agreement to receive computer services
          for a period of five years. As part of the agreement, the company with
          which the Bank signed the agreement undertook to provide the Bank with
          ongoing management and operational services of its information
          systems, operation and maintenance of hardware, computers, peripheral
          equipment, communications and infrastructure software, operation and
          maintenance of applications, making changes and adjustments to the
          information systems, data security, etc. In 2007 and 2008, the cost of
          the service will amount to NIS 2.3 million per annum. This agreement
          will expire on December 31, 2008 and the parties have no commitment to
          extend it further.

     4.   During 2006, the Bank signed an agreement to receive storage and
          archive services for a period of four years, ending at the end of
          April 2010. The annual cost is estimated at NIS 77 thousand.

     5.   The Bank entered into agreements whereby it will participate in
          private investment funds. The total amount approved for investment by
          the Bank amounts to U.S.$ 20 million. The said investment funds invest
          in Israeli companies or companies related to Israel and in hi-tech
          companies. The investment in them is presented under the "Securities"
          item. The major part of the investments made by these funds is in the
          credit component. The balance of these liabilities as at balance sheet
          date amounts to U.S.$ 1.5 million.

                                     F - 54
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     C.   INDEMNIFICATION AND EXEMPTION WRITS FOR SENIOR OFFICERS

     1)   The Bank issued to its officers and directors a writ of
          indemnification that was approved by the shareholders' general meeting
          of the Bank on August 8, 2002. According to the writ of
          indemnification that was issued, the Bank undertook to indemnify its
          officers and directors in respect of any monetary liability imposed on
          them in favor of another person in accordance with a court ruling
          (including a ruling made as part of a compromise and an arbitration
          decision that received court approval) and in respect of reasonable
          legal expenses (including attorney fees), that are imposed on them
          following actions (defined as including acts of omission or
          commission) that were taken and/or will be taken by them due to their
          being officers or directors of the Bank or as part of a position or
          duty that they fulfilled and/or will fulfill at the request of the
          Bank or on its behalf in a company or other corporate entity or any
          business venture in which the Bank has invested or will invest,
          providing that these actions are connected with one or more of the
          types of events detailed in the writ of indemnification including,
          inter alia, the following events:

          o    The issuance of securities.

          o    Using voting rights and rights to appoint directors in a company
               in which the Bank held and/or will hold shares and/or in another
               company and/or business venture in which the Bank has or will
               invest.

          o    Voting for or against any decision of the board of directors, a
               committee, etc., of a company, entity or venture as
               aforementioned.

          o    The realizing of collateral provided to the Bank.

          o    The approval of credit and/or the provision of credit and other
               actions as part of the Bank's permissible business in accordance
               with the Banking Law (Licensing) - 1981.

          o    The holding of assets in trust.

          o    The providing of an underwriting commitment.

          o    A transaction in assets executed by the Bank for itself.

          o    The issuance of a report or notice as required by law.

          o    The receipt of licenses and permits.

          o    Events connected to employee-employer relations.

          o    The privatization of the Bank and any course of action performed
               to further the privatization or in connection therewith

          o    Any refraining from executing one or more of the aforementioned
               acts.

          The amount of the total cumulative indemnification that is payable
          according to the aforementioned writ of indemnification shall not
          exceed 25% of the Bank's shareholders' equity according to its
          financial statements for March 31, 2002, which was NIS 640.3 million,
          meaning no more than NIS 160.1 million, linked to the CPI published in
          respect of March 2002. The indemnification is subject to the
          provisions of the Companies Law and to various conditions as specified
          in the writ of indemnification. It is noted that Amendment 3 to the
          Companies Law - 1999 (dated March 7, 2005) provides, inter alia, that
          an indemnification commitment (such as the aforementioned writ of
          indemnification) has to be limited to events the board of directors
          believes may actually occur at the time of providing the
          indemnification commitment and to an amount or criterion the board of
          directors deems as reasonable under the circumstances of the matter.
          The question of the amendment applying to existing writs of
          indemnification and the interpretation of the aforementioned
          restriction have not yet been addressed in court rulings and therefore
          the effects of the amendment on the aforementioned writ of
          indemnification are uncertain.

                                     F - 55
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     C.   INDEMNIFICATION AND EXEMPTION WRITS FOR SENIOR OFFICERS (CONT'D)

          In May 2003, the Audit Committee and the Board of Directors of the
          Bank approved the applicability of the indemnification writ to an
          additional director whose appointment ended prior to July 11, 2002.

     2)   On November 1, 2004 the Bank issued a writ of indemnification to an
          employee of the Bank in connection with a claim that was filed in
          March 2004 against her, the Bank and additional senior officers of the
          Bank, which for purposes of court fees was set at NIS 1 million.
          Details of this claim are presented in section D hereunder. As set
          forth there, the action was struck out by consent of the parties.

     3)   On July 17, 2005 the Bank issued a writ of indemnification to a former
          employee of the Bank regarding a possible claim that may be filed
          against him by a customer of the Bank and/or representatives of the
          customer. The Bank has taken legal measures against this customer in
          respect of a liability in the amount of U.S. $ 250,000. The pleadings
          filed by the aforementioned customer also include various allegations
          against the aforementioned employee.

     4)   On December 20, 2005 the Bank issued a writ of indemnification to a
          receiver that was appointed at the request of the Bank to a
          construction project that was financed by the Bank, with respect to a
          claim in the amount of NIS 1,356,459 that was filed against him (as
          the receiver) and against the Bank, details of which are provided in
          section D hereunder. As noted there, the suit against the receiver was
          summarily dismissed.

     5)   On February 11, 2005 the Bank issued a writ of indemnification in
          favor of an attorney of the Bank who was appointed as the execution
          office receiver for the purpose of realizing a mortgage of the Bank.
          The writ of indemnification was issued in respect of proceedings the
          Bank and aforementioned attorney took in order to annul the sale
          agreement that was prepared by the said attorney in the framework of
          realizing the mortgage in favor of the Bank.

     D.   LEGAL ACTIONS

     Legal actions, including a motion to approve a claim as a class action,
     were filed against the Bank in the ordinary course of business. Management
     of the Bank, on the basis of legal opinions regarding the prospects of the
     claims, believes that when necessary, adequate provisions were included in
     the financial statements to cover possible losses in respect of those
     claims.

     Following are details of legal actions against the Bank in material
     amounts:

     1)   In March 2003, Lehava Underwriters Ltd. (by virtue of its being a
          shareholder of the Bank) filed a derivative claim in the amount of NIS
          409.5 million against eleven senior officers of the Bank (current and
          past) and against the Bank itself. The plaintiff claims that the named
          senior officers breached their "duty of care" towards the Bank and
          were negligent in fulfilling their duty and, as a result, should be
          required to pay the Bank the amount of the claim, as compensation for
          the damages they inflicted on the Bank.

                                     F - 56
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

          According to the claim, the negligence of the senior officers is
          According to the claim, the negligence of the senior officers is
          reflected in, among other things, the credit that they granted without
          suitable collateral, problems with the credit-granting policy and the
          quality and approval procedures thereof, credit risk management and
          the ongoing handling of the credit. The amount of the suit, in respect
          of damages incurred as a result of the alleged negligence, reflects
          the amount of the allowances for doubtful debts recorded by the Bank
          in 2002. The Bank notified the insurers with which it had, at the time
          the suit was filed, a directors and senior officers liability
          insurance policy, of the filing of the suit. The insurers have
          notified the Bank that they have certain reservations regarding the
          insurance coverage of the claim and that they reserve their rights on
          this matter. The Bank rejects these reservations in their entirety and
          intends to act in order to fully exercise its rights against the
          insurers. The defendants filed a motion to have the suit summarily
          dismissed on the grounds that the plaintiff should have filed a motion
          for approval of the claim as a derivative claim. The Court accepted
          the position of the defendants and it ordered the plaintiff to file a
          motion for the approval of the claim as a derivative claim. Such a
          motion was submitted on December 7, 2003. The Bank delegated an
          attorney to represent it in the claim and the motion for approval. The
          hearing on the motion was held on May 26, 2005. On June 18, 2006, the
          Court decided to reject the motion to approve the suit as a derivative
          suit and awarded the defendants court costs and attorney fees. On
          September 18, 2006, the plaintiff appealed the decision to reject the
          motion to approve the suit as a derivative suit to the Supreme Court.
          The court set dates for the filing of written summaries by the parties
          to the suit and set the date for completion of oral arguments on
          November 26, 2007. This date was later postponed until February 14,
          2008. In the opinion of the Bank's legal counsels, since the claim is
          a derivative action in which the Bank is only a formal respondent, the
          Bank's exposure in respect thereto is only for expenses (including
          court fees, expenses of the plaintiff, fee to the attorney of the
          plaintiff and special compensation to the plaintiff).

     2)   In October 2002, Mr. Arye Fin (a shareholder of the Bank) filed with
          the Tel Aviv-Jaffa District Court a legal action against the Bank,
          against the State of Israel (as controlling shareholder in the Bank),
          and against 17 former and current officers of the Bank (two of which
          were removed later from the action), together with a motion to have
          the suit approved as a class action. The class action was filed in the
          name of all those who purchased shares of the Bank between December 1,
          2001 and August 22, 2002, and the cause of the action is the alleged
          breach of the duty to report under the Securities Law - 1968 and the
          Securities Regulations (Periodic and Immediate Reports) - 1970 enacted
          thereunder (hereinafter - the Securities Regulations). As claimed in
          the action, during the aforementioned period, a number of
          extraordinary events and/or matters occurred that indicated that the
          Bank was in serious condition, and both these events and matters, and
          the Bank's very situation mandated that the Bank file an immediate
          report under the Securities Regulations. Such a report was not filed.
          The estimated damages being claimed in the action is NIS 20 million
          and, alternatively, NIS 14 million. The Bank notified the insurers
          with which it had, at the time the suit was filed, a bankers policy
          and a directors and senior officers liability insurance policy of the
          filing of the suit. The insurers carrying the bankers policy notified
          the Bank that the bankers policy does not cover the claim. The Bank
          was also notified by the insurers carrying the directors and senior
          officers liability insurance policy that they have certain
          reservations regarding the validity of the claim's insurance coverage
          and that they reserve their rights on this matter.

                                     F - 57
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

          The Bank rejects these reservations in their entirety and intends to
          act in order to fully exercise its rights against the insurers. The
          Bank transferred the handling of the suit and the motion to have the
          suit recognized as a class action to an attorney acting on its behalf.
          The Court has not yet handed down a ruling on the motion to have the
          suit approved as a class action. On May 17, 2005 the Court accepted
          the motion of the plaintiff and ordered the disclosure of a number of
          documents by the Bank. The Bank filed an appeal on the ruling
          regarding the disclosure of documents and the appeal was dismissed on
          March 9, 2006. On April 3, 2006, the Bank petitioned the Supreme Court
          for permission to appeal the decision dismissing its appeal on the
          disclosure of documents. On January 22, 2007, the Supreme Court
          decided, with the consent of the parties, that part of the documents
          in respect of which the Bank filed its appeal would not be disclosed,
          whereas the others would be disclosed. The Bank transferred to the
          plaintiff those documents which, at its understanding, it had to
          disclose. On February 27, 2007, the plaintiff petitioned the District
          Court demanding that the Bank disclose documents which the plaintiff
          claimed the Bank had to disclose. The Bank has not yet responded to
          the petition. A preliminary hearing on the motion to approve the suit
          as a class action was held on June 13, 2007. At the hearing, the Bank
          and the plaintiff informed the Court that advanced negotiations were
          taking place between the parties to settle the matter, which will make
          superfluous further hearings in the case. On July 11, 2007, a
          settlement agreement was signed between the parties, which is subject
          to the approval of the Bank's shareholders at a General Meeting
          (scheduled to be held on August 20, 2007) and the approval of the
          Court. According to the settlement agreement, the Bank will pay to the
          plaintiff class the sum of NIS 4.7 million. In addition, the Bank will
          pay a special remuneration to the plaintiff, plaintiff's attorneys'
          fees and various other expenses, all of which will amount to
          approximately NIS 1.5 million. At the same time, a settlement
          agreement was signed between the Bank and the insurers of the Bank's
          Directors and Officers according to which the insurers will reimburse
          the Bank for half of the cost of the above setlement agreement with
          the plaintiff (up to a total amount of NIS 6.25 million) and an
          additional amount of NIS 1 million for legal expenses incurred by the
          Bank.

                                     F - 58
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

     3)   In September 2004, various financial entities that hold class C and/or
          CC and/or CC1 shares of the Bank filed with the Tel Aviv-Jaffa
          District Court an originating motion in which the Court was requested,
          inter alia, to instruct the Bank to pay to its shareholders a dividend
          at the rates and dates it was paid until the second quarter of 2002.
          The petitioners contend, inter alia, that according to the Bank's
          articles of association, the Bank is required to pay to the holders of
          its preferred shares an annual dividend at the rate of 7.5%, that
          this dividend is not actually a dividend but rather a payment made in
          full by the State of Israel in respect of the perpetual deposits the
          Bank keeps with it, and therefore its distribution is not subject to
          the distribution conditions provided in the law, and that even if the
          distribution conditions should be applied, the Bank should still be
          ordered to distribute the requested dividend, due to the Bank's
          meeting the repayment ability test as the dividend is being fully
          financed by the State of Israel and not being deducted from the
          capital of the Bank. The Bank transferred the handling of the
          originating motion to attorneys acting on its behalf. Since in the
          opinion of the Bank, the matter of the dividend distribution, which is
          the issue of the aforementioned originating motion, is connected to
          the question of whether under the circumstances of a non-distribution
          of dividends, the interest on the perpetual deposits of the Bank with
          the Ministry of Finance is accrued in its favor, and since the answers
          received so far from the Ministry of Finance were not clear enough and
          were insufficient, the Bank filed an originating motion with the Court
          on March 9, 2005 against the Minister of Finance and the
          aforementioned financial entities, in which it requested (among other
          things) a declaratory ruling by which the interest on the perpetual
          deposits is indeed accrued in favor of the Bank. Following the request
          of the Bank and the aforementioned financial entities the Court
          ordered that the hearing on the two originating motions be
          consolidated. A preliminary hearing on the originating motions took
          place on January 12, 2006. In the reply of the Minister of Finance to
          the originating motions prior to the aforementioned preliminary
          hearing, the Minister of Finance announced that his position is that
          the interest on the perpetual deposits does not accrue in favor of the
          Bank when it does not distribute a dividend, and that even so, in
          light of the Bank's circumstances, there is no justification for the
          distribution of a dividend by the Bank.

                                     F - 59
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

          On March 23, 2006, the Court decided that in the first stage, the
          question of the accrual of interest on the perpetual deposits of the
          Bank with the Treasury will be discussed and resolved, since a
          resolution of this question will advance the hearing and the
          resolution of the rest of the questions that must be answered. In
          connection with this, the parties filed written arguments and were to
          have made oral arguments as well. On November 15, 2006, the Court
          permitted the completion of the written arguments that had already
          been filed and decided that there was no need for oral arguments. The
          completion of the arguments ended in January 2007, but as yet no
          decision has been given. In the opinion of the Bank's legal advisors,
          the Bank will probably not be exposed to any monetary exposure as a
          result of the originating motion that was filed against it, since the
          Bank's legal advisors believe that if the Court orders the payment of
          the dividend to the petitioning financial institutions, the State will
          have to pay the Bank the amount of the dividend out of the interest on
          the Bank's perpetual deposits with the Treasury.

     4)   In May 2006, a suit was filed in the Rehovot Magistrates Court, in an
          amount of NIS 2.5 million against the Bank, a receiver that was
          appointed at the request of the Bank in respect of a carpentry
          workshop and the purchaser of the workshop from the receiver.
          According to the statement of claim, the Bank agreed to allow the
          plaintiffs who were the owners of the workshop to find a purchaser for
          the workshop by themselves, but when the potential purchaser that the
          owners found heard that the workshop was in receivership, he entered
          into an agreement with the Bank and the receiver for the purchase of
          the workshop at an amount that was lower than the amount that he
          undertook to pay the plaintiffs. The plaintiffs also claim that the
          Bank and the receiver did not insure the premises and equipment of the
          workshop and, therefore, they are liable for the damages that occurred
          to the premises and the equipment as a result of a fire that broke out
          at the workshop. The handling of the suit was transferred to an
          attorney on behalf of the Bank.

     5)   In October 2005, a company, that performs engineering and plumbing
          work, filed a claim with the Tel Aviv-Jaffa District Court in the
          amount of NIS 1.4 million against the Bank, a receiver that was
          appointed at the request of the Bank to a residential and commercial
          project that encountered difficulties, and against the owner of the
          land that at the time had entered into a joint venture with the
          promoter that had constructed the project with the financing of the
          Bank. The plaintiff company allegedly performed work on the project at
          the request of the promoter, which had failed and did not repay its
          debt to the plaintiff company. The claim states that the amount
          requested reflects the amount the promoter still owes the plaintiff
          company in respect of the work it executed on the project with the
          addition of interest and/or linkage differences. The plaintiff company
          contends that due to principles of "construction loan" financing and
          the Bank having granted to the promoter bank financing for
          construction of the project, the Bank should be considered responsible
          for repayment of the debt. Furthermore, it contends that at the time
          it had entered into the agreement with the promoter, the Bank should
          have brought to its attention the information the plaintiff contends
          was in the possession of the Bank, regarding the difficult condition
          of the promoter and the project. The handling of the claim was
          transferred to the care of an attorney acting on behalf of the Bank.
          On March 14, 2006, the suit against the receiver was summarily
          dismissed, but the suit against the Bank and the owner of the property
          (who has since passed away) remained in place.

                                     F - 60
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

     6)   In June 2004, two former employees of the Bank, who had filled senior
          positions in the Bank, filed a suit against the Bank with the Tel
          Aviv-Jaffa Labor Court in the total amount (for both of them) of NIS
          2.3 million. The claim is for the payment of certain benefits, which
          the plaintiffs allege were due to them with regard to their retirement
          from the Bank in 2002. The suit was filed also against the Ministry of
          Finance Commissioner of Wages and Labor Agreements in respect of the
          non-approval of these payments. Alternatively the aforementioned
          plaintiffs claim the salary raises they allege that they forfeited in
          the past in exchange for the aforementioned benefits. The Bank has
          transferred the matter to an attorney acting on its behalf. On June
          20, 2005 the aforementioned plaintiffs filed a request for a partial
          ruling in the amount of NIS 415 thousand, in respect of amounts the
          payment of which was approved by the Ministry of Finance Commissioner
          of Wages and Labor Agreements without conditioning the approval upon
          their relinquishing any additional claims. The Bank has filed an
          objection to the request. The Court has not yet ruled on the request.

     7)   In September 2003, a supplier of fuel products filed a claim in the
          amount of NIS 6 million with the Tel Aviv-Jaffa District Court against
          the Bank and two other banks regarding non-payment of the
          consideration for fuel products it had provided to a mutual customer
          of the three defending banks. It is alleged that the involvement of
          the defending banks in the approval of the business plan and in the
          approval of the expense and income budget of the aforementioned
          customer, had created a representation towards the plaintiff on which
          it had relied at the time of delivery of its products, because it had
          assumed that the expenses included in the approved plan and/or budgets
          would be paid by the defending banks. The Bank has transferred the
          matter to an attorney acting on its behalf.

     8)   In August 2000 a suit was filed with the Tel Aviv-Jaffa District Court
          against one of the Bank's former senior executives and against 24
          other defendants by a number of venture capital funds. For purposes of
          the court fee, the amount of the suit was set at $ 18.7 million, which
          was later increased to $ 22.5 million. The suit also includes a
          request for a remedy of receiving shares in kind. According to the
          plaintiff's complaint, the suit was filed, among other reasons, in
          connection with the breach of an investment agreement, whereby the
          plaintiffs and other investors were allegedly supposed to receive
          46.5% of the shares of a company in which the aforementioned senior
          executive served in the past as a director on behalf of a former
          grandchild subsidiary of the Bank. The claim was transferred to an
          attorney and a defense brief was submitted. In 2005, the insurers
          carrying the directors and senior officers liability insurance policy,
          at the time the claim was filed, notified the Bank that in their
          opinion the claim does not have insurance coverage, but the Bank's
          legal counsels handling the claim estimate that if the said executive
          has to make any monetary payment in respect of the suit, the payment
          will be covered by the insurance policy.

     In the opinion of Management of the Bank, which is based on the opinion of
     its legal counsel, the Bank's exposure in respect of pending claims, whose
     prospects of success are not remote and regarding which a provision was not
     recorded, amounts to approximately NIS 30 million.

                                     F - 61
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     E.   NON-REPORTING IN THE U.S. REGARDING SHARES CONSIDERED "ABANDONED"

     The Bank's D and DD preference shares were issued in the U.S., as were some
     of the C and CC preference shares and capital notes of the Bank. According
     to U.S. state law, under certain circumstances, a security that is
     unclaimed for is considered to be "abandoned" and it must be reported each
     year to the state in which the last residence of the owner of the security
     is located. The same state is also entitled to take ownership of the
     security. The shares and capital notes were issued in the U.S. many years
     ago and the ongoing handling of the securities was done by an agent in the
     U.S. The information which reached the Bank indicates that no reports were
     filed with the various states regarding securities that by their laws
     became "abandoned". Failure to file the required reports may expose the
     Bank to financial sanctions. There are various issues involved which still
     require further investigation, such as the volume of the securities
     involved, whether the securities are indeed subject to U.S. law or to
     Israeli law, who is therefore entitled to them as a result of their being
     "abandoned", the likelihood of sanctions and the possibility of having them
     cancelled, and to what extent the Bank is liable for the failure to report.
     At this stage, the Bank is unable to assess the financial consequences, if
     at all.

     F.   OFF-BALANCE SHEET COMMITMENT AT YEAR-END IN RESPECT OF ACTIVITY BASED
          ON COLLECTION OF LOANS*

                                                          DECEMBER 31   DECEMBER 31
                                                             2006         2005
                                                            -------      -------
                                                           REPORTED     REPORTED
                                                            AMOUNTS      AMOUNTS
                                                            -------      -------
                                                         NIS MILLIONS  NIS MILLIONS
                                                            -------      -------

Credit from deposits based on extent of collection**
Unlinked Israeli currency                                     335.6        343.0
CPI linked Israeli currency                                     4.7          4.7
Foreign currency                                              188.6        205.4
                                                            -------      -------

Total                                                         528.9        553.1
                                                            =======      =======

     *    Credit and deposits from deposits the repayment of which to the
          depositor is contingent upon the collection of credit (or deposits).
          The Bank presently has no interest margin or collection commission
          with respect to the handling of such credit.

     **   The aforementioned credit and deposits mainly derive from agreements
          that were made with the State regarding the granting of credit as
          follows:

          -    Loans intended for research and development.

          -    Loans in the framework of the fund for small businesses.

          -    Loans that were granted in the framework of Amendment 39 of the
               Law for the Encouragement of Capital Investments.

     As at December 31, 2006, the activity based on the extent of collection
     includes past due balances amounting to NIS 524.2 million (December 31,
     2005 - NIS 548.4 million).

                                     F - 62
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     G.   ANNUAL REPORTING IN THE U.S.

     Since the Bank had in the past issued its securities to holders in the
     U.S., the Bank is required under American law to submit an annual report to
     the United States Securities and Exchange Commission (hereinafter - SEC).
     The Bank has for decades submitted this annual report on a form known as
     20F. As part of the annual report to the SEC the Bank has to fulfill
     various reporting and disclosure requirements that are not applicable in
     Israel, including a reconciliation of its financial statements to the
     accepted accounting principles in the United States (U.S. GAAP). This
     reconciliation is made by providing a qualitative note on the differences
     between Israeli GAAP and U.S. GAAP and by providing a quantitative note,
     which presents the results of the reporting entity's financial statements
     as if they had been prepared according to U.S. GAAP. The Bank used to
     include the qualitative note regarding the differences between Israeli GAAP
     and U.S. GAAP in its financial statements in the U.S., but it did not
     include the quantitative note.

     One of the requirements applicable in the U.S. is that an auditors' report
     be attached to the financial statements. The auditors of the Bank refrained
     from providing a report on the financial statements that were submitted by
     the Bank in the U.S. in respect of the years 2001 and 2002, because of,
     inter alia, the non-inclusion of a quantitative note regarding
     reconciliation of the Bank's financial statements to U.S. GAAP. After the
     Bank's legal counsel in the U.S. examined the matter and concluded that the
     prospects were slim for receiving an exemption from submitting the annual
     report in the USA, the Bank began preparing to submit its annual report for
     2003 and to comply with the reporting and disclosure requirements relating
     to this report. The Bank was supposed to submit the report by July 15, 2004
     at the latest, but there was a delay and it was submitted only on January
     19, 2005, mainly because of the complex accounting issues the Bank had to
     deal with in order to reconcile its financial statements to U.S. GAAP. The
     non-compliance with part of the requirements applicable to the financial
     statements filed in the U.S., including the non-inclusion of an auditors'
     report as aforementioned, and the delay in filing the annual report for
     2003, may expose the Bank to sanctions and/or claims on the part of various
     parties. The reports regarding 2004 and 2005 were filed on time (in both
     years, taking into account the Bank's having timely filed a notification of
     late filing on Form 12b-25).

NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY PERIODS

     A.   VOLUME OF OPERATIONS

     1.   Stated amount of ALM derivative instruments (1)

                               DECEMBER 31, 2006            DECEMBER 31, 2005
                            ----------------------        ----------------------
                           CPI/SHEKEL      FOREIGN       CPI/SHEKEL      FOREIGN
                           INTEREST       CURRENCY       INTEREST       CURRENCY
                           CONTRACTS      CONTRACTS      CONTRACTS      CONTRACTS
                            -------        -------        -------        -------
                               REPORTED AMOUNTS              REPORTED AMOUNTS
                            ----------------------        ----------------------
                         NIS MILLIONS   NIS MILLIONS   NIS MILLIONS    NIS MILLIONS
                            -------        -------        -------        -------

Options purchased                 -              -              -           14.5
Forward contracts              45.9           53.4           45.8          136.7
                            -------        -------        -------        -------

Total                          45.9           53.4           45.8          151.2
                            =======        =======        =======        =======

     (1)  Derivatives comprising part of the asset and liability management of
          the Bank, not designated for hedging purposes.

                                     F - 63
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
           PERIODS (CONT'D)

     A.   VOLUME OF OPERATIONS (CONT'D)

     2.   Gross fair value of ALM derivative instruments (1)

                                      DECEMBER 31, 2006           DECEMBER 31, 2005
                                    ---------------------       ----------------------
                                  CPI/SHEKEL      FOREIGN      CPI/SHEKEL     FOREIGN
                                   INTEREST       CURRENCY      INTEREST      CURRENCY
                                   CONTRACTS      CONTRACTS    CONTRACTS      CONTRACTS
                                    -------       -------       -------        -------
                                      REPORTED AMOUNTS              REPORTED AMOUNTS
                                    ---------------------       ----------------------
                                 NIS MILLIONS   NIS MILLIONS  NIS MILLIONS   NIS MILLIONS
                                    -------       -------       -------        -------

Gross positive fair value               1.0           1.1             -            3.5
Gross negative fair value                 -             -           0.5              -
                                    -------       -------       -------        -------

Total                                   1.0           1.1          (0.5)           3.5
                                    =======       =======       =======        =======

     B.   DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO
          THE CONTRACT

                                                                       DECEMBER 31, 2006
                                                                 -------------------------------
                                                                         REPORTED AMOUNTS
                                                                 -------------------------------
                                                                           NIS MILLIONS
                                                                 -------------------------------
                                                                 BANKS     CENTRAL BANKS    TOTAL
                                                                 ----           ----        ----

Gross positive fair value of derivative instruments               2.1              -         2.1
Off-balance sheet credit risk in
 respect of derivative instruments (2)                            9.9              -         9.9
                                                                 ----           ----        ----

Total credit risk in respect of derivative instruments           12.0              -        12.0
                                                                 ====           ====        ====

                                                                         DECEMBER 31, 2005
                                                                 ------------------------------------
                                                                          REPORTED AMOUNTS
                                                                 ------------------------------------
                                                                             NIS MILLIONS
                                                                 ------------------------------------
                                                                  BANKS      CENTRAL BANKS     TOTAL
                                                                 -------        -------       -------

Gross positive fair value of derivative instruments                  3.5              -           3.5
Off-balance sheet credit risk in
 respect of derivative instruments (2)                              18.2            1.4          19.6
                                                                 -------        -------       -------

Total credit risk in respect of derivative instruments              21.7            1.4          23.1
                                                                 =======        =======       =======

     (1)  Derivatives comprising part of the asset and liability management of
          the Bank, not designated for hedging purposes.

     (2)  Off-balance sheet credit risk relating to derivative instruments
          (including those with a negative fair value) as computed for
          limitation on individual borrower indebtedness.

                                     F - 64
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
           PERIODS (CONT'D)

     C.   MATURITY PERIOD - STATED AMOUNTS AT YEAR-END

                                                  DECEMBER 31, 2006
                                        -------------------------------------
                                                  REPORTED AMOUNTS
                                        -------------------------------------
                                        UP TO       FROM 3 MONTHS
                                       3 MONTHS      TO 1 YEAR         TOTAL
                                        -------        -------        -------
                                     NIS MILLIONS   NIS MILLIONS    NIS MILLIONS
                                        -------        -------        -------

CPI/Shekel interest contracts              20.5           25.4           45.9
Foreign currency contracts                 53.4              -           53.4
                                        -------        -------        -------

Total                                      73.9           25.4           99.3
                                        =======        =======        =======

                                                  DECEMBER 31, 2005
                                        --------------------------------------
                                                   REPORTED AMOUNTS
                                        --------------------------------------
                                         UP TO       FROM 3 MONTHS
                                       3 MONTHS        TO 1 YEAR         TOTAL
                                        -------         -------        -------
                                      NIS MILLIONS   NIS MILLIONS    NIS MILLIONS
                                        -------         -------        -------

CPI/Shekel interest contracts              25.3            20.5           45.8
Foreign currency contracts                151.2               -          151.2
                                        -------         -------        -------

Total                                     176.5            20.5          197.0
                                        =======         =======        =======

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     This note contains information on the methods of arriving at the fair value
     of financial instruments. Most of the Bank's financial instruments are not
     traded on active markets and thus market quotations are not available.
     Therefore, the fair value is arrived at by using accepted pricing models,
     such as the present value of future cash flows discounted at interest
     rates, which reflect the level of risk intrinsic to the financial
     instrument. Estimating the fair value by way of determining the future cash
     flows and setting the discount interest rate is subjective. Therefore,
     regarding most of the financial instruments, the fair value estimate is not
     necessarily an indication of the instrument's realizable value on balance
     sheet date. The estimate of the fair value was made at interest rates
     prevailing at balance sheet date and did not take post-balance sheet date
     interest rate fluctuations into consideration. The use of other interest
     rates could result in significantly different fair values. This is
     especially true in regard to non-interest bearing financial instruments or
     those bearing fixed interest rates. Furthermore, commissions receivable or
     payable as a result of the business activity were not taken into account
     and neither was the tax effect.

                                     F - 65
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT'D)

     Moreover, the difference between the book value and fair value of the
     financial instruments may not be realized since, in most cases, the Bank is
     likely to hold the instruments until redemption. In view of the above, it
     should be emphasized, that the data contained in this note should not be
     considered as an indication of the value of the Bank as a going concern.
     Furthermore, considering the wide range of valuation and estimation
     techniques which may be applied in arriving at fair values, caution should
     be used in comparing the fair values arrived at by different banks.

     PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
     VALUE ESTIMATES OF FINANCIAL INSTRUMENTS

     GENERAL - As mentioned in Note 1A, the Bank needed a credit line from the
     Bank of Israel. The credit line from the Bank of Israel bears the Bank of
     Israel rate of interest. The discount rate of the cash flows of the
     deposits raised by the Bank is set, for purposes of the fair value of the
     liabilities, on the basis of the said interest rates.

     DEPOSITS WITH BANKS AND CREDIT TO THE GOVERNMENT - By use of the method of
     discounting future cash flows at interest rates used by the Bank in similar
     transactions proximate to balance sheet date.

     MARKETABLE SECURITIES - Are valued at market value. Shares for which no
     market value is readily available are stated at cost.

     CREDIT TO THE PUBLIC - The fair value of the balance of credit to the
     public was arrived at by using the method of the present value of future
     cash flows discounted at an appropriate interest rate. The balance of such
     credit was segmented into several categories. The future aggregate cash
     flows of each category (principal and interest) were calculated. Such cash
     inflows were discounted at an interest rate, which reflects the level of
     risk inherent in the credit. Generally, this interest rate is set on the
     basis of the rate at which similar transactions of the Bank were effected
     as at balance sheet date. For short-term balances of credit (for an initial
     period of up to three months), or balances at variable market interest
     rates (prime, Libor, etc.), which change at intervals of up to three
     months, their stated value is considered to be their fair value.

     The fair value of problematic debts was calculated by using discount rates
     reflecting their inherent high credit risk. In any event, such discount
     rates were not less than the highest interest rate used by the Bank in its
     operations proximate to balance sheet date. The future cash flows of
     problematic debts were calculated net of the specific allowances for
     doubtful debts. The general and supplementary allowances for doubtful debts
     in an aggregate amount of NIS 51.7 million (on December 31, 2005 - NIS 57.6
     million), were not deducted from the balance of credit to the public for
     cash flows purposes in assessing the fair value.

     PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY - The accepted pricing models
     cannot be applied to such deposits. Therefore, their book value is
     considered to be their fair value (see Note 8 for details of the terms of
     these deposits).

     DEPOSITS, DEBENTURES AND CAPITAL NOTES - The fair value of these
     liabilities was arrived at by the method of discounting the future cash
     flows at the interest rate paid by the Bank in obtaining similar deposits,
     or the interest rate of similar debentures and capital notes issued by the
     Bank, prevailing as at balance sheet date.

                                     F - 66
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
     VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     DEPOSITS FROM THE BANK OF ISRAEL - The balance in the balance sheet is a
     close approximation of the fair value since the deposits are at variable
     rates of interest.

     NON-PARTICIPATING PREFERENCE SHARES - The accepted pricing models do not
     address this type of share. As a result, the fair value is presented as
     book value (for information pertaining to the rights of these shares and
     the dividend in arrears, see Notes 14 and 16).

     PARTICIPATING PREFERENCE SHARES - The accepted pricing models do not
     address this type of share. As a result, the fair value is presented as
     book value (for information pertaining to the rights of these shares and
     the dividend in arrears, see Notes 15 and 16).

     DERIVATIVE FINANCIAL INSTRUMENTS - Instruments having an active market,
     were valued at market value. Where these instruments are traded on several
     markets, valuation was based on quotations in the most active market.
     Derivatives that are not traded on an active market, were valued based on
     models used by the Bank in its current operations which take into
     consideration the inherent risk of the financial instrument (market risk,
     credit risk etc.).

     FINANCIAL INSTRUMENTS (OTHER THAN DERIVATIVE AND MARKETABLE FINANCIAL
     INSTRUMENTS) FOR AN INITIAL PERIOD NOT EXCEEDING THREE MONTHS AND AT
     VARIABLE MARKET INTEREST RATES - The amount stated in the balance sheet
     represents an approximation of the fair value subject to changes in credit
     risks and interest margins of the Bank in transactions at variable interest
     rates.

                                     F - 67
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     Following are balances and fair value estimates of financial instruments:

                                                               DECEMBER 31, 2006
                                          --------------------------------------------------------------
                                                     BALANCE SHEET AMOUNTS
                                          -------------------------------------------
                                                             OTHER
                                         FINANCIAL         FINANCIAL
                                       INSTRUMENTS(1)     INSTRUMENTS          TOTAL          FAIR VALUE
                                          -------           -------           -------           -------
                                                                REPORTED AMOUNTS
                                          --------------------------------------------------------------
                                       NIS MILLIONS      NIS MILLIONS      NIS MILLIONS       NIS MILLIONS
                                          -------           -------           -------           -------

FINANCIAL ASSETS
Cash and deposits with banks                 56.2              10.2              66.4              66.5
Securities                                   49.7               0.7              50.4              50.4
Credit to the public                        322.7           6,196.4           6,519.1           6,514.5
Credit to governments                           -              41.5              41.5              41.8
Other financial assets                        4.5                 -               4.5               4.5
Perpetual deposits with the
 Israeli Treasury                           825.8                 -             825.8             825.8
                                          -------           -------           -------           -------

Total financial assets                    1,258.9           6,248.8           7,507.7           7,503.5
                                          =======           =======           =======           =======

FINANCIAL LIABILITIES
Deposits of the public                       33.8              33.1              66.9              68.2
Deposits of banks                           761.5               6.8             768.3             768.4
Deposits of the Government
 and a perpetual deposit                      0.1           6,087.4           6,087.5           6,088.2
Capital notes                                   -              24.9              24.9              25.4
Other financial liabilities                  25.1                 -              25.1              25.1
Non-participating preference
 Shares                                     303.2                 -             303.2             303.2
Participating preference shares             187.4                 -             187.4             187.4
                                          -------           -------           -------           -------

Total financial liabilities               1,311.1           6,152.2           7,463.3           7,465.9
                                          =======           =======           =======           =======

     (1)  Financial instruments, the balance sheet amount of which represents
          the estimated fair value - financial instruments stated at market
          value, or instruments with an initial maturity period not exceeding
          three months, or instruments based on market interest rates that vary
          at intervals of up to three months.

                                     F - 68
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     Following are balances and fair value estimates of financial instruments
     (cont'd):

                                                             DECEMBER 31, 2005
                                       -------------------------------------------------------------
                                                 BALANCE SHEET AMOUNTS
                                       -------------------------------------------
                                                          OTHER
                                      FINANCIAL         FINANCIAL
                                    INSTRUMENTS(1)     INSTRUMENTS          TOTAL          FAIR VALUE
                                       -------           -------           -------           -------
                                                             REPORTED AMOUNTS
                                       -------------------------------------------------------------
                                    NIS MILLIONS      NIS MILLIONS      NIS MILLIONS      NIS MILLIONS
                                       -------           -------           -------           -------

FINANCIAL ASSETS
Cash and deposits with banks              56.2              16.7              72.9              73.2
Securities                                62.5               0.7              63.2              63.2
Credit to the public                     486.7           7,194.0           7,680.7           7,669.4
Credit to governments                      1.8              57.2              59.0              60.0
Other financial assets                     6.0                 -               6.0               6.0
Perpetual deposits with the
 Israeli Treasury                        828.2                 -             828.2             828.2
                                       -------           -------           -------           -------

Total financial assets                 1,441.4           7,268.6           8,710.0           8,700.0
                                       =======           =======           =======           =======

FINANCIAL LIABILITIES
Deposits of the public                   106.9              71.3             178.2             180.0
Deposits of banks                      1,033.7              15.1           1,048.8           1,048.1
Deposits of the Government
 and a perpetual deposit                   0.1           6,883.0           6,883.1           6,877.4
Capital notes                                -              26.9              26.9              27.3
Other financial liabilities               22.0                 -              22.0              22.0
Non-participating preference
 Shares                                  330.3                 -             330.3             330.3
                                       -------           -------           -------           -------

Total financial liabilities            1,493.0           6,996.3           8,489.3           8,485.1
                                       =======           =======           =======           =======

     (1)  Financial instruments, the balance sheet amount of which represents
          the estimated fair value - financial instruments stated at market
          value, or instruments with an initial maturity period not exceeding
          three months, or instruments based on market interest rates that vary
          at intervals of up to three months.

                                     F - 69
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 22 - INTERESTED AND RELATED PARTIES

     "Related Parties" and "Interested Parties" of the Bank, as defined in
     Opinion No. 29 of the Institute of Certified Public Accountants in Israel
     and the Securities Regulations (Preparation of Annual Financial Statements)
     - 1993, are: The State of Israel; Bank Hapoalim B.M.; Israel Discount Bank
     Ltd.; Bank Leumi le-Israel B.M.; the General Manager, Directors of the Bank
     and companies related to them, affiliates of the Bank and their related
     companies.

     The Bank also conducts transactions with all or some of the aforementioned
     parties, in the ordinary course of business on terms applicable to its
     transactions in general. As it is not practical to separately record the
     transactions with such entities, it is not possible to reflect the
     information required by the said Opinion except for the following details:

     A.   BALANCES

                                                     DECEMBER 31, 2006                                                 DECEMBER 31, 2005
                                  ----------------------------------------------------------  ---------------------------------------------------------
                                     AFFILIATES AND THEIR                                       AFFILIATES AND THEIR
                                       RELATED COMPANIES       DIRECTORS AND GENERAL MANAGER      RELATED COMPANIES        DIRECTORS AND GENERAL MANAGER
                                  ---------------------------    ---------------------------  ---------------------------  ----------------------------
                                  BALANCE AT        HIGHEST       BALANCE AT     HIGHEST       BALANCE AT      HIGHEST      BALANCE AT       HIGHEST
                                    BALANCE          BALANCE       BALANCE       BALANCE        BALANCE        BALANCE        BALANCE        BALANCE
                                     SHEET         DURING THE       SHEET       DURING THE       SHEET        DURING THE       SHEET       DURING THE
                                     DATE            YEAR(1)         DATE         YEAR(1)         DATE          YEAR(1)        DATE          YEAR(1)
                                  ------------   ------------    ------------   ------------  ------------   ------------  ------------    ------------
                                                                                    REPORTED AMOUNTS
                                  ---------------------------------------------------------------------------------------------------------------------
                                  NIS MILLIONS   NIS MILLIONS    NIS MILLIONS   NIS MILLIONS  NIS MILLIONS   NIS MILLIONS  NIS MILLIONS    NIS MILLIONS
                                  ------------   ------------    ------------   ------------  ------------   ------------  ------------    ------------

ASSETS
Credit to the public                   0.2            0.3              -              -            0.3            0.4              -              -

LIABILITIES
Deposits of the public                   -              -              -              -              -            0.1              -            0.6
Other liabilities                        -              -            0.2            0.2              -              -            0.2            0.2

     (1)  On the basis of the balances at the end of each month.

                                     F - 70
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)

     B.   SUMMARY OF RESULTS OF OPERATIONS WITH INTERESTED AND RELATED PARTIES

                                           2006           2005
                                       ------------  ------------
                                       DIRECTORS AND  DIRECTORS AND
                                         GENERAL        GENERAL
                                         MANAGER        MANAGER
                                       ------------  ------------
                                           REPORTED AMOUNTS
                                       --------------------------
                                       NIS MILLIONS  NIS MILLIONS
                                       ------------  ------------

Profit from financing
 operations before allowance
 for doubtful debts (1)                       -           -
Allowance for doubtful debts                  -           -
Operating and other expenses (2)            2.3         2.4

     (1)  See details in D hereunder.

     (2)  See details in C hereunder.

     C.   BENEFITS TO INTERESTED PARTIES

                                                2006                         2005
                                     --------------------------   ------------------------
                                  DIRECTORS AND GENERAL MANAGER  DIRECTORS AND GENERAL MANAGER
                                     --------------------------   ------------------------
                                         REPORTED AMOUNTS             REPORTED AMOUNTS
                                     --------------------------   ------------------------
                                                      NUMBER OF                  NUMBER OF
                                     NIS MILLIONS    RECIPIENTS   NIS MILLIONS  RECIPIENTS
                                     ------------    ----------   ------------  ----------

Interested parties employed by
 the Bank (1)                             1.7             2          1.7            2
Fees to directors not employed
 by the Bank                              0.6            10          0.7           10

     (1)  Not including payroll VAT.

     See Note 18A regarding employment agreements with the Chairman of the Board
     of the Bank and its General Manager.

                                     F - 71
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)

     D.   RESULTS OF FINANCING OPERATIONS (BEFORE ALLOWANCE FOR DOUBTFUL DEBTS)
          WITH INTERESTED AND RELATED PARTIES

                                                       2006        2005         2004
                                                     -------      -------      -------
                                                             REPORTED AMOUNTS
                                                     ---------------------------------
                                                  NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                     -------      -------      -------

Income deriving from credit to the public                  -            -            -
Expenses deriving from deposits of the public              -            -            -
                                                     -------      -------      -------
Net results from financing operations
 before allowance for doubtful debts                       -            -            -
                                                     =======      =======      =======

     Definitions in this note:

     -    Interested parties - as defined in Paragraph 1 of the definition of an
          "interested party in a company" in Section 1 of the Securities Law.

     -    Related party - as defined in Opinion 29 of the Institute of Certified
          Public Accountants in Israel.

     -    Directors and General Manager - including their spouses and minors
          (Opinion 29 of the Institute of Certified Public Accountants in
          Israel).

     E.   CREDIT TO THE ISRAEL ELECTRIC CORPORATION LTD. AND DEPOSITS OF THE
          GOVERNMENT

     The Bank provided long-term credit to the Israel Electric Corporation Ltd.
     which was granted out of a deposit of the State. The State provided a
     guarantee as security for the repayment of such credit to the Bank. As at
     December 31, 2006, the balance of the credit was NIS 5,671 million (as at
     December 31, 2005 - NIS 6,405 million). An expense of NIS 89 million was
     recorded in respect of the aforementioned credit in 2006. This refers to
     dollar-denominated credit and due to the decrease in the exchange rate of
     the dollar, negative exchange rate differentials were recorded. In 2005,
     income of NIS 864 million was recorded, constituting more than 10% of the
     profit from financing operations before the allowance for doubtful debts in
     the said year.

     As aforementioned, the source for this credit was a deposit of the State of
     Israel. In addition to the said deposit, the balance of the Government
     deposits includes also deposits made in order to provide loans in the
     framework of the Kibbutzim arrangement and other deposits made in order to
     provide other long-term loans. As at December 31, 2006 the overall balance
     of the Government deposits amounted to NIS 6,087 million compared with NIS
     6,883 million as at December 31, 2005. Financing income in an amount of NIS
     84 million was recorded in 2006 in respect of the Government deposits,
     compared with an expense of NIS 902 million in 2005.

                                     F - 72
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 23 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS

                                                                                                    2006          2005          2004
                                                                                                  -------       -------       -------
                                                                                                           REPORTED AMOUNTS
                                                                                                  -----------------------------------
                                                                                                NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                                                                  -------       -------       -------

A.    INCOME (EXPENSES) DERIVING FROM ASSETS:
Credit to the public                                                                                (39.7)        979.3         524.7
Credit to governments                                                                                (0.9)          1.0           1.1
Deposits with Bank of Israel                                                                            -           0.1             -
Deposits with banks                                                                                   0.7           8.2           2.9
Debentures                                                                                              -           0.3           0.6
                                                                                                  -------       -------       -------
                                                                                                    (39.9)        988.9         529.3
                                                                                                  -------       -------       -------

B.    (EXPENSES) INCOME DERIVING FROM LIABILITIES
Deposits of the public                                                                               (4.4)        (15.4)        (24.0)
Deposits of the Government                                                                           84.2        (901.7)       (385.0)
Deposits of Bank of Israel                                                                          (45.2)        (43.0)        (72.6)
Deposits of banks                                                                                     0.9           0.7          (2.7)
                                                                                                  -------       -------       -------
                                                                                                     35.5        (959.4)       (484.3)
                                                                                                  -------       -------       -------

C.    INCOME DERIVING FROM DERIVATIVE FINANCIAL
        INSTRUMENTS
Net income from ALM derivative instruments*                                                          11.6           1.8           5.0
                                                                                                  -------       -------       -------
                                                                                                     11.6           1.8           5.0
                                                                                                  -------       -------       -------

D.    OTHERS
Commissions from financing operations                                                                12.1          13.4          14.7
Other financing income**                                                                             11.6          28.1          13.1
Other financing expenses                                                                            (12.7)        (11.2)        (11.6)
                                                                                                  -------       -------       -------
                                                                                                     11.0          30.3          16.2
                                                                                                  -------       -------       -------
Total profit from financing operations before
 allowance for doubtful debts                                                                        18.2          61.6          66.2
                                                                                                  =======       =======       =======

Including - exchange rate differences, net                                                           (9.8)         15.6          11.5
                                                                                                  =======       =======       =======

E.    RESULTS FROM INVESTMENTS IN DEBENTURES
Financing income on accrual basis on available-for-
 sale debentures (included in income from assets)                                                       -           0.3           0.6
Gain on sale of available-for-sale debentures
 (included in other financing income)                                                                   -             -           0.5
                                                                                                  -------       -------       -------

Total profit from investments in debentures                                                             -           0.3           1.1
                                                                                                  =======       =======       =======

*    Derivatives  comprising part of the asset and liability
     management  system of the Bank, not designated for hedging purposes.

**   Including income from interest collected in
      respect of problematic debts                                                                    9.4          21.6          10.5
                                                                                                  =======       =======       =======

                                     F - 73
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 24 - OPERATING COMMISSIONS

                                                         2006         2005        2004
                                                       -------      -------      -------
                                                               REPORTED AMOUNTS
                                                       ---------------------------------
                                                     NIS MILLIONS NIS MILLIONS  NIS MILLIONS
                                                       -------      -------      -------

Ledger fees (in Israeli and foreign currency)              0.4          1.1          1.6
Payment order system services                              0.1          0.1          0.2
Customer foreign trade transactions                        0.2          0.2          0.1
Credit handling and drafting of contracts                    -          0.1          0.3
Computerized information services and
 confirmations                                               -          0.1          0.1
Others                                                     0.6          0.6          1.8
                                                       -------      -------      -------

Total operating commissions                                1.3          2.2          4.1
                                                       =======      =======      =======

NOTE 25 - GAINS ON INVESTMENTS IN SHARES

                                                               2006          2005          2004
                                                             -------       -------       -------
                                                                      REPORTED AMOUNTS
                                                             -----------------------------------
                                                          NIS MILLIONS  NIS MILLIONS   NIS MILLIONS
                                                             -------       -------       -------

Gains on sale of available-for-sale shares                      10.3          11.3          38.0
Dividend from available-for-sale and trading shares              6.1             -           3.5
                                                             -------       -------       -------

Total gains on investments in shares                            16.4          11.3          41.5
                                                             =======       =======       =======

NOTE 26 - OTHER INCOME

                                      2006         2005         2004
                                    -------      -------      -------
                                             REPORTED AMOUNTS
                                    ---------------------------------
                                 NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                    -------      -------      -------

Gains on severance funding              0.8          0.6          1.0
Others                                  3.0          4.1          3.6
                                    -------      -------      -------

Total other income                      3.8          4.7          4.6
                                    =======      =======      =======

                                     F - 74
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

 NOTE 27 - SALARIES AND RELATED EXPENSES

                                                    2006         2005           2004
                                                  -------       -------       -------
                                                            REPORTED AMOUNTS
                                                  -----------------------------------
                                               NIS MILLIONS   NIS MILLIONS  NIS MILLIONS
                                                  -------       -------       -------

Salaries                                             13.8          14.5          16.5
Severance pay, provident fund, pensions,
 education fund, vacation pay,
 sick leave pay and long service bonuses              3.0           2.8           2.3
National Insurance Institute                          0.7           0.8           0.9
Other related expenses                                0.1           0.1             -
                                                  -------       -------       -------

Total salaries and related expenses                  17.6          18.2          19.7
                                                  =======       =======       =======

NOTE 28 - OTHER EXPENSES

                                                             2006           2005          2004
                                                            -------       -------       -------
                                                                     REPORTED AMOUNTS
                                                            -----------------------------------
                                                         NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                            -------       -------       -------

Marketing and advertising                                       0.1           0.1           0.1
Communications (postage, telephone,
 courier fees, etc.)                                            0.4           0.4           0.6
Computer (not including salaries and
 depreciation)                                                  3.3           4.3           5.2
Office expenses                                                 0.2           0.3           0.3
Insurance                                                       3.2           4.7           6.3
Professional services                                           3.4           4.8           6.3
Directors' fees (not including a director employed
 as a senior executive)                                         0.6           0.7           0.8
Staff training, further education, etc.                         0.1             -             -
Others                                                          3.0           1.2           0.8
                                                            -------       -------       -------

Total other expenses                                           14.3          16.5          20.4
                                                            =======       =======       =======

                                     F - 75
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 29 - TAXES ON INCOME

     A.   COMPOSITION:

                                             2006         2005         2004
                                           -------      -------      -------
                                                   REPORTED AMOUNTS
                                           ---------------------------------
                                        NIS MILLIONS NIS MILLIONS  NIS MILLIONS
                                           -------      -------      -------

Taxes for the current year                       -            -            -
Taxes in respect of prior years                  -            -            -
                                           -------      -------      -------

Provision for taxes on income                    -            -            -
                                           =======      =======      =======

     B.   RECONCILIATION BETWEEN THE THEORETICAL TAX AND THE TAX EXPENSE

     Following is the reconciliation between the theoretical tax applying to the
     operating profit of the Bank, based on the statutory tax rate applicable to
     banks in Israel, and the tax expense on operating profit, as reflected in
     the statement of income:

                                                                                 2006             2005             2004
                                                                               -------          -------          -------
                                                                                            REPORTED AMOUNTS
                                                                               -----------------------------------------
                                                                             NIS MILLIONS    NIS MILLIONS      NIS MILLIONS
                                                                               -------          -------          -------

Statutory tax rate                                                               40.65%           43.59%           45.76%
                                                                               =======          =======          =======

Tax (tax savings) at the current statutory rate                                   (7.0)            (3.7)             0.6

Tax (tax savings) in respect of:
Increase (erosion) due to inflation                                               (0.2)             2.2              0.2
General and supplementary allowances for
  doubtful debts                                                                  (2.4)            (5.2)            (8.9)
Non-deductible expenses                                                            0.1              0.1              0.1
Exempt income                                                                      1.1                -             (0.3)
Differences and tax benefits in respect of which
 deferred taxes had not been recorded, net                                         7.3              3.6              4.8
Loss for purposes of profit VAT which
  cannot be set off                                                                1.1              3.0              3.5
                                                                               -------          -------          -------

Tax expense on operating income, reflected in the statement of income                -                -                -
                                                                               =======          =======          =======

     C.   The Bank has been issued final tax assessments for all years through
          2003.

     D.   Carryforward tax losses in respect of which deferred tax assets were
          not recorded total NIS 703 million (in 2005 - NIS 685 million).

                                     F - 76
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 29 - TAXES ON INCOME (CONT'D)

     E.   In 2006 and 2005, the Bank recorded payroll VAT receivable in the
          amounts of NIS 2.8 million and NIS 3.1 million, respectively, as a
          result of losses for purposes of VAT on profit.

     F.   On July 25, 2005 the Knesset passed the Law for the Amendment of the
          Income Tax Ordinance (No. 147 and Temporary Order) - 2005 (hereinafter
          - Amendment 147). Amendment 147 provides for a gradual reduction in
          the company tax rate in the following manner: in 2007 the tax rate
          will be 29%, in 2008 the tax rate will be 27%, in 2009 the tax rate
          will be 26% and from 2010 onward the tax rate will be 25%.
          Furthermore, as from 2010, upon reduction of the company tax rate to
          25%, real capital gains will be subject to tax of 25%.

          On June 29, 2006, a VAT Order was issued reducing the rate of VAT on
          profit from 17% to 15.5%, commencing on July 1, 2006. In 2006, the VAT
          on profit applicable to the Bank will be 16.25%. Accordingly, the
          statutory tax rate that will apply to the Bank will be 38.53% in 2007,
          36.8% in 2008, 35.93% in 2009 and 35.06% in 2010.

NOTE 30 - DESIGNATED DEPOSITS AND CREDIT AND DEPOSITS GRANTED THEREFROM

                                                      DECEMBER 31      DECEMBER 31
                                                         2006             2005
                                                        -------          -------
                                                       REPORTED         REPORTED
                                                        AMOUNTS          AMOUNTS
                                                        -------          -------
                                                      NIS MILLIONS     NIS MILLIONS
                                                        -------          -------

CREDIT AND DEPOSITS OUT OF DESIGNATED DEPOSITS
Credit to the public                                    5,840.1          6,619.4
                                                        -------          -------

Total                                                   5,840.1          6,619.4
                                                        =======          =======

DESIGNATED DEPOSITS
Deposits of the Government                              5,977.1          6,761.4
                                                        -------          -------

Total                                                   5,977.1          6,761.4
                                                        =======          =======

     Credit out of designated deposits includes NIS 5,671.0 million, which is
     secured by a State guarantee. The annual interest margin in respect of this
     credit amounts to NIS 0.3 million (as at December 31, 2005 the balance of
     the credit secured by a State guarantee was NIS 6,405.0 million).

                                     F - 77
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 31 - INFORMATION ON NOMINAL DATA BASIS

                                  DECEMBER 31      DECEMBER 31
                                     2006             2005
                                    -------          -------
                                  NIS MILLIONS     NIS MILLIONS
                                    -------          -------

Total assets                        7,516.3          8,720.7
Total liabilities                   7,496.4          8,523.7
                                    -------          -------

Total shareholders' equity             19.9            197.0
                                    =======          =======

                                          2006          2005         2004
                                      ------------  ------------  ------------
                                      NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                      ------------  ------------  ------------

NOMINAL NET EARNINGS (LOSS)               (17.1)       (8.4)          1.4

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS

     A.   The bank's financial statements conform with Israeli generally
          accepted accounting principles and the instructions of the Supervisor
          of Banks in Israel ("Israeli GAAP"), which differ in certain respects
          from those generally accepted in the United States of America ("U.S.
          GAAP") as described below:

          1.   EFFECT OF INFLATION:

          The Bank, in accordance with Israeli GAAP, comprehensively includes
          the effect of price level changes in the accompanying financial
          statements, as described in Note 1C. According to such Israeli
          accounting principles, the Bank has discontinued the adjustment of the
          financial statements as at January 1, 2004.

          U.S. GAAP does not provide for recognition of the effects of such
          price level changes. However, such effects have not been quantified or
          included in a reconciliation to U.S. GAAP.

          2.   SPECIFIC PROVISION FOR LOAN LOSSES

          In accordance with Israeli GAAP:

          The provision for loan losses is determined on a specific basis,
          taking the following factors into consideration:

          a.   The financial position of the borrower, including an assessment
               of the likelihood of repayment of the loan within an acceptable
               period and the extent of the Bank's other commitments to the same
               borrower.

                                     F - 78
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          2.   SPECIFIC PROVISION FOR LOAN LOSSES (CONT'D)

          b.   The realizable value of any security for the loan; and

          c.   The cost associated with obtaining repayment and realization of
               any such security.

          In accordance with U.S. GAAP:

          Financial Accounting Standards (FAS) 114, as amended by FAS 118,
          prescribes the accounting treatment by creditors with respect to
          impairment of loans. These standards cover all creditors and all
          loans, except:

          a.   Large groups of small-balance homogeneous loans that are
               collectively evaluated for impairment.

          b.   Loans that are measured at fair value or at the lower of cost or
               fair value.

          c.   Leases, as defined in FAS 13.

          d.   Debt securities, as defined in FAS 115.

          These standards cover every loan, which is part of an arrangement
          restructuring liabilities, involving modifications of terms of the
          loans, including those involving a receipt of assets in partial
          satisfaction of a receivable.

          In accordance with FAS 114, a loan is impaired when it is probable,
          based on current information and events, that the creditor will be
          unable to collect all amounts (contractual interest and principle
          payments) due according to the contractual terms of the loan
          agreement.

          Loans impaired are measured based on the present value of the expected
          future cash flows, discounted at the loan's effective interest rate
          or, alternatively, based on the observable market price of the loan or
          the fair value of the collateral, if the loan is collateral dependent.

          3.   GENERAL PROVISION FOR LOAN LOSSES

          In accordance with Israeli GAAP:

          The directives of the Supervisor of Banks require that, commencing
          with 1992, banks include, in addition to the specific allowance for
          doubtful debts, a supplementary allowance for doubtful debts, which
          replaces the general allowance, which had been required up to that
          time.

          The supplementary allowance for doubtful debts is based upon excessive
          credit balances, measured according to specified quality
          characteristics of the credit portfolio, as provided in the directives
          of the Supervisor of Banks.

                                     F - 79
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          3.   GENERAL PROVISION FOR LOAN LOSSES (CONT'D)

          In accordance with the aforementioned requirements, a portion of the
          general allowance, as at December 31, 1991, equal to 1% of the total
          debt to which it was related at that date, is to be maintained in
          inflation adjusted values. According to a directive of the Supervisor
          of Banks the adjustment to inflation of the general allowance was
          discontinued as at January 1, 2005.

          In accordance with U.S. GAAP:

          Each bank determines its own methodology for general reserve based on
          past experience of credit losses and on the quality of its credit
          portfolio.

          In light of the structure of the Bank's credit portfolio and its
          concentrations, the Bank is considering the application of FAS 114 to
          all its borrowers without recording a general provision.

          4.   NON-PARTICIPATING PREFERENCE SHARES

          Preferred D and DD shares that were issued by the Bank, pay 7.5%
          cumulative dividend, linked to the U.S. dollar exchange rate and
          redeemable by the Bank. The redemption dates of these preferred shares
          will be determined by the Bank, subject to the approval of the State
          of Israel's Treasury.

          In accordance with Israeli GAAP:

          These preferred shares are presented as a liability and not as part of
          shareholders' equity since the Bank has a contractual obligation to
          pay dividend on these Preference Shares, and since the Bank does not
          have an unconditional right to avoid paying the aforementioned
          dividend.

          In accordance with U.S. GAAP:

          Since the Bank controls the decision on the redemption and since it
          does not anticipate that it will redeem the preferred shares, these
          preferred shares are presented as part of the shareholders' equity.

          5.   PARTICIPATING PREFERENCE SHARES

          Preferred C, CC and CC1 shares that were issued by the Bank, pay 6%
          cumulative dividend, linked to the U.S. dollar exchange rate. These
          Preferred Shares are not redeemable.

          In accordance with Israeli GAAP:

          On January 1, 2006, the Bank implemented for the first time accounting
          Standard No. 22, "Financial Instruments: Disclosure and Presentation".
          According to this Standard, these preferred shares are presented as a
          liability and not as part of shareholders' equity since the Bank has a
          contractual obligation to pay dividend on these Preference Shares, and
          since the Bank does not have an unconditional right to avoid paying
          the aforementioned dividend.

          In accordance with U.S. GAAP:

          Since these Preferred Shares are not redeemable, they are presented as
          part of the shareholders' equity.

                                     F - 80
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          6.   LIABILITY FOR TERMINATION BENEFITS IN REGARD WITH COLLECTIVE
               TERMINATION AGREEMENT AND PERSONAL AGREEMENTS

          In accordance with Israeli GAAP:

          The Bank recognized a liability for involuntary termination benefits
          in accordance with the collective termination agreement and certain
          personal agreements, for those employees that under the Bank's
          management best estimation it is probable that they will be
          involuntary terminated. The liability was calculated under the
          assumption that those employees would be terminated as at the Balance
          Sheet date.

          In regard to the personal agreements with the Chairman of the Board,
          CEO and Deputy CEO, the Bank recorded a provision in the amount that
          in management's estimate would be obligated to compensate them for the
          period after their expected termination and till the end of the period
          during which the Bank is obligated to employ them in accordance with
          their personal agreements.

          In accordance with U.S. GAAP:

          All these agreements grant involuntary termination benefits, and are
          accounted for in accordance with SFAS 88. The liability is recognized
          when it is probable that employees will be entitled to termination
          benefits and the amount can be reasonably estimated.

          Since the employees are required to render services until they are
          terminated in order to receive termination benefits, the liability and
          loss are recognized ratably over the expected future service period.

          As discussed in Note 1A, the "Run-Off" plan which was originally
          supposed to end as of June 30, 2006, was extended until July 31, 2008.
          This resulted in a change of an accounting estimate and the remaining
          liability and loss are now recognized over the new expected future
          service period which is expected to end on July 31, 2008.

          7.   LINKAGE DIFFERENCES ON PERPETUAL DEPOSIT WITH THE ISRAELI
               TREASURY

          In accordance with Israeli GAAP:

          Linkage differences on the perpetual deposit with the Israeli Treasury
          were credited to the shareholders' equity item.

          In accordance with U.S. GAAP:

          These linkage differences are reported in the profit and loss
          statement.

                                     F - 81
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          8.   EARNINGS/LOSS PER SHARE

          In accordance with Israeli GAAP:

          The dividend on the preferred shares which was accrued but not yet
          been declared was not added to the calculation of the loss on the
          ordinary A shares since no income has been recorded in respect of the
          interest on the perpetual deposits, the payment of which, in the
          opinion of the Bank's management, is contingent upon payment of the
          dividend in respect of the aforementioned preferred shares.

          Furthermore, it is not required to add to the calculation of the loss
          on the ordinary A shares, the dollar exchange rate linkage differences
          on the principal of the preferred shares net of the erosion deriving
          from the change in the general purchasing power of the Israeli
          currency.

          In accordance with U.S. GAAP:

          Both the accrued but not yet paid dividend on the preferred shares and
          the dollar exchange rate linkage differences on the principal of the
          preferred shares net of the erosion deriving from the change in the
          general purchasing power of the Israeli currency were added to the
          calculation of the loss on the ordinary A shares.

          9.   PERPETUAL DEPOSITS WITH THE STATE OF ISRAEL

          In accordance with Israeli GAAP:

          Due to the agreement between the Bank and the Israeli Treasury
          regarding the changes in the method of computing the linkage on the
          perpetual deposits with the State of Israel (see Note 8), an increase
          in the amounts of the perpetual deposits as well as in the Bank's
          shareholders' equity is recorded.

          In accordance with U.S. GAAP:

          According to EITF 85-1, as this transaction involved issuance of
          capital securities to the Israeli Treasury in exchange for non-cash
          consideration, no increase in the Bank's shareholders' equity is
          recorded due to the said agreement.

          10.  COMMITMENT IN RESPECT OF ACTIVITY BASED ON COLLECTION OF LOANS

          In accordance with Israeli GAAP:

          Deposits, the payment of which is dependent on collection of loans,
          and the loans that were granted from the proceeds of such deposits,
          are set off and presented on net basis, as the Bank has no credit
          risk.

          In accordance with U.S. GAAP:

          The transactions mentioned above do not meet the set off conditions
          under U.S. GAAP, hence, the deposits and loans are presented on gross
          basis.

                                     F - 82
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          11.  SUMMARY OF SIGNIFICANT PRESENTATION DIFFERENCES OF BALANCE SHEET
               ITEMS BETWEEN ISRAELI GAAP AND U.S. GAAP:

          a.   Non-marketable shares included in securities available for sale
               under Israeli GAAP were classified to other assets under U.S.
               GAAP.

          b.   Accrued interest receivable included in credit items was
               classified to other assets under U.S. GAAP.

          c.   The provision for severance pay net of amounts deposited in
               provident funds is presented under Israeli GAAP in other
               liabilities. Under U.S. GAAP, such funded amounts that do not
               release the Bank from liability to pay severance upon retirement,
               are presented in other assets, and related liability is presented
               in other liabilities.

          d.   Accrued interest payable included in deposit items was
               reclassified to other liabilities under U.S. GAAP.

          e.   See note 4E regarding a customer's debt reclassified to
               securities item and presented according to market value of the
               shares pledged in favor of the Bank. In accordance with U.S. GAAP
               this customer's debt is presented in credit to public balance
               sheet line item.

          12.  STATEMENT OF OTHER COMPREHENSIVE INCOME

          In accordance with Israeli GAAP:

          No disclosure is given regarding comprehensive income.

          In accordance with US GAAP:

          SFAS 130 "Reporting comprehensive income" requires that all items that
          are required to be recognized under the accounting standards as
          components of comprehensive income be reported in a financial
          statement and displayed in the same prominence as other financial
          statements. It requires that an enterprise (a) classify items of other
          comprehensive income by their nature in a financial statement and (b)
          display the accumulated balance of other comprehensive income
          separately from retained earnings and additional paid in capital in
          the equity section of the statement of financial position.

                                     F - 83
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     B.   The effect of the material differences between Israeli and U.S. GAAP
          on the financial statements

          1.   STATEMENTS OF OPERATIONS:

                                                                        YEAR ENDED DECEMBER 31
                                                          --------------------------------------------------
                                                             2006                2005                2004
                                                          ----------          ----------          ----------
                                          NOTE           NIS MILLIONS        NIS MILLIONS       NIS MILLIONS
                                       ----------         ----------          ----------          ----------

(A)
Net earnings (loss) as
 reported, according to
 Israeli GAAP                                                  (17.1)               (8.4)                1.4
                                                          ----------          ----------          ----------

Specific provision for loan
 losses                                    32.A.2                3.9                 5.0                 2.6
General provision for loan
 losses                                    32.A.3               (5.9)              (12.0)               (8.9)
Liability for termination
 benefits                                  32.A.6               (2.0)               (1.8)               (6.9)
Linkage differences on
 perpetual deposits with
 the Israeli Treasury                      32.A.7              (43.8)               34.3                (8.2)
                                                          ----------          ----------          ----------
                                                               (47.8)               25.5               (21.4)
                                                          ----------          ----------          ----------

Net earnings (loss)
 according to U.S. GAAP                                        (64.9)               17.1               (20.0)
                                                          ==========          ==========          ==========

                                                                       YEAR ENDED DECEMBER 31
                                                          --------------------------------------------------
                                                             2006                2005                2004
                                                          ----------          ----------          ----------
                                                             NIS                 NIS                  NIS
                                                          ----------          ----------          ----------

(B) Earnings (loss) per share

BASIC EARNINGS (LOSS) PER "A" ORDINARY
 SHARE:
As reported according to Israeli GAAP                       (1,132.4)           * (556.3)             * 92.7
As reported according to U.S. GAAP                          (2,936.4)           (3,983.5)           (3,019.3)
Number of shares                                              15,100              15,100              15,100

*  Restated. See note 1.Q.

                                     F - 84
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     2.   BALANCE SHEET:

                                                          DECEMBER 31, 2006                                 DECEMBER 31, 2005
                                               ----------------------------------------         ----------------------------------------
                                             AS REPORTED     ADJUSTMENTS       U.S. GAAP      AS REPORTED     ADJUSTMENTS       U.S. GAAP
                                               -------         -------          -------         -------         -------          -------
                                             NIS MILLIONS   NIS MILLIONS     NIS MILLIONS    NIS MILLIONS    NIS MILLIONS      NIS MILLIONS
                                               -------         -------          -------         -------         -------          -------

Cash and deposits with banks                      66.4               -             66.4            72.9               -             72.9
Securities (1)(2)(3)                              50.4           (50.4)               -            63.2           (63.2)               -
Available-for-sale
 securities (1)                                      -             2.0              2.0               -             6.4              6.4
Credit to the public (3)(4)(5)(6)              6,519.1           (18.0)         6,501.1         7,680.7           (30.8)         7,649.9
Credit to governments (4) (13)                    41.5           528.3            569.8            59.0           552.3            611.3
Fixed assets                                       1.1               -              1.1             1.2               -              1.2
Other assets (2)(4)(7)                            12.1           134.7            146.8            15.6          *162.2           *177.8
Perpetual deposits with the
 Israeli Treasury (11)                           825.8          (335.2)           490.6           828.2          (293.8)           534.4
                                               -------         -------          -------         -------         -------          -------
Total assets                                   7,516.4           261.4          7,777.8         8,720.8           333.1          9,053.9
                                               =======         =======          =======         =======         =======          =======
Deposits of the public (8)                        66.9            (1.0)            65.9           178.2            (5.2)           173.0
Deposits of banks (8)                            768.3           (10.5)           757.8         1,048.8           (10.8)         1,038.0
Deposits of the
 government (8) (13)                           6,087.4           440.2          6,527.6         6,883.0           450.5          7,333.5
Perpetual deposits                                 0.1               -              0.1             0.1               -              0.1
Capital notes                                     24.9               -             24.9            26.9               -             26.9
Other liabilities (7)(8)(9)                       58.2           116.0            174.2            56.4          *131.9           *188.3
Non-participating
 shares (10)                                     303.2          (303.2)               -           330.3          (330.3)               -
Participating preference
shares (11)                                      187.4          (187.4)               -               -               -                -
Shareholders' equity
(see 3 below) (3)(5)(6)(9)(10)(11)(12)            20.0           207.3            227.3           197.1            97.0            294.1
                                               -------         -------          -------         -------         -------          -------
Total liabilities and
 shareholders' equity                          7,516.4           261.4          7,777.8         8,720.8           333.1          9,053.9
                                               =======         =======          =======         =======         =======          =======

(1)  Classification from securities item to available-for-sale securities.

(2)  Classification of non-marketable shares from securities item to other
     assets item (see note 32.A.11.a).

(3)  A customer's debt in respect of which shares were pledged in favor of the
     Bank (see note 32.A.11.e).

(4)  Classification of accrued interest receivables from credit items to other
     assets item (see note 32.A.11.b).

(5)  Specific provision for loan losses (see note 32.A.2).

(6)  General provision for loan losses (see note 32.A.3).

(7)  Classification of amounts deposited in provident funds in respect of
     severance pay liabilities from other liabilities item, to other assets item
     (see note 32.A.11.c).

(8)  Classification of accrued interest payables from deposit items to other
     liabilities items (see Note 32.A.11.d).

(9)  Liability for termination benefits (see note 32.A.6).

(10) Classification of participating preference shares to shareholders' equity
     item (see note 32.A.5).

(11) Classification of non-participating preference shares to shareholders'
     equity item (see note 32.A.4).

(12) The agreement between the Bank and the Israeli Treasury regarding the
     changes in the method of computing the linkage on the perpetual deposits
     (see Note 32.A.9).

(13) Commitment in respect of activity based on collection of loans (see note
     32.A.10).

(*) Reclassified.

                                     F - 85
```

```

                               The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     3.   STATEMENT OF OTHER COMPREHENSIVE INCOME

                                                                     YEAR ENDED DECEMBER 31
                                                        -------------------------------------------------
                                                           2006                2005               2004
                                                        ----------          ----------         ----------
                                                       NIS MILLIONS        NIS MILLIONS       NIS MILLIONS
                                                        ----------          ----------         ----------

Net earnings (loss) according to U.S. GAAP                   (64.9)               17.1              (20.0)

Unrealized gains (losses) on available-for-sale
 securities                                                   (2.0)                1.8              (10.0)
                                                        ----------          ----------         ----------

Net comprehensive income (loss) according to
 U.S. GAAP                                                   (66.9)               18.9              (30.0)
                                                        ==========          ==========         ==========

     4.   SHAREHOLDERS' EQUITY:

                                                                         DECEMBER 31         DECEMBER 31
                                                                            2006                2005
                                                                         ----------          ----------
                                                         NOTE           NIS MILLIONS        NIS MILLIONS
                                                      ----------         ----------          ----------

Shareholders' equity as reported according to
 Israeli GAAP                                                                  20.0               197.1

A customer debt in respect of which shares
 were pledged in favor of the Bank                     32.A.11.e               (8.1)               (3.6)

Specific provision for loan losses                        32.A.2                2.8                (1.1)

General provision for loan losses                         32.A.3               51.7                57.6

Liability for termination benefits                        32.A.6                5.6                 7.6

Perpetual deposits with the State of Israel               32.A.9             (335.3)             (293.8)

Classification of non-participating shares to
 shareholders' equity item                                32.A.4              303.2               330.3

Classification of participating preference
shares to shareholders' equity item                       32.A.5              187.4                   -
                                                                         ----------          ----------

Shareholders' equity according to U.S. GAAP                                   227.3               294.1
                                                                         ==========          ==========

     C.   STATEMENTS OF CASH FLOWS

     There are no material differences in the presentation of the Statement of
     Cash Flows between Israeli GAAP and U.S. GAAP.

                                     F - 86
```